Hawkish Powell postpones easing once again, troubling the markets with his ‘higher for longer’ slogan. Equity continues – slowly but surely – its strong performance YTD. Rate cuts are getting complicated – possibly even July isn’t a done deal yet – but stay strong and trust the US economy and corporate America’s earnings. Keep a long position in equities (with a 3% weekly stop), and continue to purchase some bonds as yields are headed lower. The biggest tail risk is inflation staying high(er for longer), forcing Central Banks to postpone easing until later in the year, followed by adverse geopolitical outcomes, and elections. 

Major market events 2nd – 5th April 2024 

Highlights for the week

Mon: FR, DE, BE, NO, AU, ZA, CH, GR, PT, SW, UK, IR, SP, IR, NZ, IT, HK, FI Easter Monday (Markets Closed), US ISM Manufacturing PMI. US Atlanta Fed GDPNow

Tue: DE Manufacturing PMI, EU Manufacturing PMI, UK Manufacturing PMI, DE CPI, US JOLTs Job Openings

Wed: EU CPI, EU Unemployment Rate, US ADP Nonfarm Employment Rate, US Services PMI, US Fed Chair Powell Speaks 

Thu: CH CPI, EU Services PMI, UK Services PMI, EU PPI, US Atlanta Fed GDPNow 

Fri: JP Household Spending, DE Factory Orders, US Nonfarm Payrolls, US Unemployment Rate, US Average Hourly Earnings

Performance Review

Index	22/3/2024	29/3/2024	WTD	YTD
Dow Jones	39,475.90	39,790.67	0.80%	5.50%
S&P 500	5,238.18	5,255.30	0.40%	10.81%
Nasdaq 100	18,339.44	18,248.15	-0.50%	10.31%
Euro Stoxx 50	5,031.15	5,083.42	1.04%	12.64%
Nikkei 225	40,008.57	40,393.44	0.96%	21.34%

Source: Google

InflectionPoint reports:

* The sky is the limit: for stocks, rates, or both? Spring is finally here, a recession is out of everybody’s mind excluding the Fed, technology has lost its leadership, and rate cuts are nowhere to be seen (and, unlike Godot, they might not well come tomorrow). Sometimes I get the feeling that we are walking on thin ice – yet, somehow, the markets manage to find their second winds to propel them higher. The latest news is that not only the magnificent 7 are contributing to the S&P 500’s advance, and this landmark index is presently outperforming the Nasdaq 100 on a YTD basis (but technology is not dead). It looks to me that the market’s current mood is to kick the can down the road, postponing the reckoning with multiples, rates, and the Fed. We have three important weeks in front of us: this one with the nonfarm payrolls, the following one with CPI and PPI, and the third one which will see the start of CT 1Q24 reporting. Amid all this, I’m presently keeping my recommendation – long equities and long bonds – although between the two it is bonds (and rates) that keep me awake at night. Global markets showed their resilience once more last week, and indeed the shift to value continues to take place – although it may meet its match when the earning reports come out. In his Good Friday speech, Chairman Powell was – once again – hawkish, and said that rates can stay higher for longer if inflation does not come down. This has pushed the May meeting to a non-event, and the June meeting to a close call, and we can’t be sure of a cut even by the end of July.  To most market pundits the (equities) markets feel extended, and rightly so – as on Thursday the S&P 500’s multiple reached a recent record of 20.9x.  Still long equities, if the ECB does eventually cut before the Fed then stay long USD, although the latest measure of US Inflation has swung that likelihood back to 50/50, and still like Japan (Warren Buffett’s endorsement was the best thing that could happen to the country), but watch out (hedge!) for the JPY. 

* Value strikes again, and rises to prominence as growth flames out. One of the issues with the technology sector is that not every company is moving in the same direction – and while many might think at Tesla, I would like to focus on Apple, whose performance YTD has been dismal. But if Apple is tied to China and if China is having a revival, can Tim Cook engineer the firm’s turnaround? I would like to think it is so, but we might have to wait for a couple of quarters for that. Rates are in a total mess – in the US hopes of a cut were in March, then May, then June, then July, and then what? I am starting to think that Tom may be right with his bet that the ECB will cut first than the Fed – so stay long USD. With the Fed and the ECB still undecided about cutting rates, most of the attention is focused on when they might start: this does matter for most of the markets, whose valuations are extended. My belief is that the markets (and the Fed) will have to look at meaningful data signalling a slowdown in inflation before the cuts will take place. The reporting season will start in earnest in 3 weeks with the banks as usual, estimates are currently low due to some EPS cuts. Personally, I have been focusing more on the historic valuations of the S&P 500 rather than on relative ones (which are also not cheap, to put it mildly). At some point, something’s got to give. 

*  Sell in May and go away, come back on St. Leger’s Day? According to the CME FedWatch tool, yes. May – once a serious contender for the Fed to begin easing – is now toast (4.5%). My own bet is still in June, in which chances of a cut are 58.8%, down from 75.1% last week, but I would not be shocked if the Executive Committee decided to wait until July (72.3%). I also note that these forecasts are highly linked to the upcoming data; the ever-so-important nonfarm payrolls on Friday and the CPI next week can have a significant impact on yields and on future rate expectations. The timeline for a move by the ECB looks firmly to 2H24, but let’s closely follow the EU CPI this Wednesday. We need (lower) yields and (higher) earnings to support some of the highest multiples since my heyday (the fated 1999-2000), but at least the US can continue to enjoy a solid economy; if and when disinflation does happen, you might want to look at small caps. Considering the shift to value, it does make sense to increase that part of the portfolio, as Goldman Sachs’ Chief US Strategist David Kostin recommended. 

* Yields on US 10-year Treasuries have reached 4.31%, with a stable increase last week; yields in Europe were mostly stable, and the EUR declined against the USD and is now hovering around 1.07. While in 1999 yields were even higher, and the Fed was hiking not easing (well they haven’t started yet), we definitely need yields to return below 4% to have a more constructive scenario. Earnings for 1Q24 are currently estimated at 3.6%, vs 5.8% on Dec 31st, and the recent results showed that most of corporate America is doing just fine. The current forward P/E ratio for the S&P 500 is 20.9x – and while it is higher both than the 5-year (19.1x) average and the 10-year average (17.7x), it is not cheap enough to withstand such high interest rates. (Yes, back in 1999, multiples AND rates were both higher – but that is a past unlikely to return). Introducing a 2024 S&P 500 bottom-up earnings estimate of 243.60 little changed from 243.55 last week, which is not too far from the top-down consensus of 245 (Goldman Sachs 241, Morgan Stanley 229, J.P. Morgan 225, Bank of America 235). For reference, the current 2025 S&P 500 bottom-up earnings estimate is 276.14.

* Growth is still plentiful according to Atlanta and New York Federal Reserve Banks, with the latter starting its forecast for 2Q24. Looking at 1Q24, the former’s GDPNow model is forecasting growth of 2.8%, revised up from last week’s 2.1%, with the Blue Chips consensus around 2.0%. The latter’s Nowcast, which produces an annual forecast that is less volatile, also saw a significant cut and now sees annual growth in 1Q24 at 1.87%, down from 1.90% last week, and down from 2.05% in December. There is still no recession forecast in their model, up to one sigma, but I wonder if this further reduction is an early signal that the US Federal Reserve should start reducing rates? Introducing a 2Q24 forecast with a growth of 2.21%, also a little bit better from last week. Earnings are expected to come in at 3.6% in 1Q24, compared with a forecast of 5.8% as of Dec 31st.  Revenue growth is faring even better, at 3.5% in 1Q24, vs 4.4% as of Dec 31st. For 2023, earnings growth is forecasted at 1.0%, vs 0.9% as of Dec 31st, with revenues coming in at 2.8%, vs 2.3% as of Dec 31st. Finally, it’s worth noticing that the chance of a recession, as calculated from the yield curve, according to the Federal Reserve Bank of Cleveland, has now risen (February 2025) to 65%, given the rebound in yields, from a bottom of 53.36% in September.

Source: Blue Chip Economic Indicators and Blue Chip Financial Forecasts; Federal Reserve Bank of Atlanta

Source: Federal Reserve Bank of New York, New York Fed Staff Nowcast

Source: Federal Reserve Board, Federal Reserve Bank of Cleveland, Haver Analytics

* Earnings are finally here – likely to overall meet/exceed estimates but watch out for the guidance. However, geopolitics and rates are likely to obscure everything for a while. Hang tight!

Earnings, What’s Next?

The reporting season is now drawing to an end. Here is a snapshot of companies reporting next week! Watch out for Nike and FedEx, which report on Thursday, After Close.

Source: Earnings Whispers

Market Considerations

Source: BofA Predictive Analytics, Bloomberg, ISABELNET.com

Revenue growth estimates for 2024 are forecasted to grow by 5.0% (5.6% on Dec 31st) and earnings growth estimates for 2024 are predicted to grow by 11.0% (11.5% on Dec 31st), so the future looks bright. Introducing estimates for 2025, which sound again very positive, with revenue to grow by 5.0% (5.6% on Dec 31st) and earnings to grow by 13.4% (12.7% on Dec 31st). As previously mentioned, the Fed probably has stopped hiking and we have reached the peak in rates, so the next move will be down, either in June, or July. Apart from the cut from quite high levels, which will probably help make these lofty multiples seem more bearable than offering a real stimulus to the economy, what will be important is to see the extent to which the Central Banks are willing to cut rates and their timeframe. This is obviously connected to the chances of the US Economy going into recession, which we’ll likely hear less and less (while paying a lot of attention to the data) until the November elections, as the current US Government has been a big spender of late. Meanwhile the upcoming US Presidential election will be a rematch of 2020’s fight between Trump and Biden. 

The highlight this week is on the importance of the  Fed’s cuts for stock market returns in a non-recessionary environment. It reports that returns 12 months after the first Fed cut are good (an average of 15%), which is equivalent to the now prevailing scenario of ‘no landing’. However, it says nothing about the S&P 500’s multiple at the time, and I note that the present high and above trend multiples are raising the averages as well – as the 5-year average of 19.1x would be rightly considered unusually high. That said, the Fed will have an impact of a tailwind – if and when it will finally cut rates. Still, in August 2000 we had a multiple of 24x and rates of 6.5% – which we took the next three years to digest. Ouch.

We are probably shifting from a monetary risk to a macro risk, where the economy’s performance is more important than what the Fed does. Obviously, we should not overlook geopolitical scenarios and the upcoming elections, in which the UK may see the first Labour government since the Tony Blair-Gordon Brown years, albeit immersed in a global shift to the right (more protectionism, less globalization). 

Last year there was an encore from the S&P, the Nasdaq 100, and the Nikkei 225, which all rose to recent highs. Europe made a remarkable comeback after a slow start, and Japan (minus the JPY) stole the show this year by topping its 34-year previous record. I continue to recommend a long position in equities (with the now famous 3% weekly stop), and I’m warming up on bonds as these reach interesting yields. Watch out for any resurgence of inflation, as this can significantly alter the scenario if persistent.

There are three main headline risks to what is otherwise a constructive view for 2024: i) any resurgence/stickiness in inflation; ii) any negative geopolitical outcome (which could see an expansion of the current conflicts); and iii) elections, particularly in the US, where a new Trump presidency looks quite likely. 

Regarding bonds, the expected disinflation in 2H23 indeed came more slowly than expected. It should continue in 1H24, but watch out for potential spanners in the works, like the issues in the Red Sea. Once again, until we have more clarity on any peaceful resolution of the conflict between Israel and Hamas or further progress in rates with yields on the US long bond going < 4.00% once again, I advise starting buying bonds in waves, keeping the overall duration below 10 years. Obviously, investing any liquidity in the money market (up to 1/2 years) still makes sense.

Don’t neglect Japan – it is the more investable part of equities right now, thanks to good economic performance and a still dovish Central Bank. The Nikkei 225’s performance is based on solid fundamentals as Nominal GDP has stormed past resistance to new highs. The JPY tried a rebound earlier in the year but faltered once again, and I personally have the feeling it may weaken further. It is still the safest part of equities. 

Portfolios

Finally, I wanted to introduce two portfolios that Tom and I have published on Wikifolio. Tom’s a multi-asset portfolio, whereas the one I manage (with substantial input from Tom) is a global income and growth with a heavy US tilt. Check them out!

Tom and I are still debating when we will reach the top in equities. There was a switch of 1% out of Apple and into Salesforce.com. Finally, we have decided to leave out Nvidia, Meta, and Tesla, to better balance the portfolio, while not necessarily being negative on the prospects for these companies.

Introducing the third portfolio on Italian Equities. Again, Unicredit has been left out intentionally to quash any possible suspicion, but I wish the company and its management team the best for the future. 

https://www.wikifolio.com/en/int/w/wf00inf8ig

https://www.wikifolio.com/en/int/w/wf000ipggi

https://www.wikifolio.com/en/int/w/wf00ipiteq

Happy trading and see you next week!

InflectionPoint

Disclaimer

All views expressed on this site are my own and do not represent the opinions of any entity with which I have been, am now, or will be affiliated. I assume no responsibility for any errors or omissions in the content of this site and there is no guarantee for completeness or accuracy. The content is food for thought and it is not meant to be a solicitation to trade or invest. Readers should perform their investment analysis and research and/or seek the advice of a licensed professional with direct knowledge of the reader’s specific risk profile characteristics.