Rates become increasingly important as the fear of no cuts this year in the US expands quickly; this is unlikely but the first cut might not happen until September. Blowout nonfarm payroll saved the day last Friday and softened the blow of a tough week. Important week with US CPI and PPI (but don’t hold your breath), and the official kickstart to the 1Q24 reporting season next Friday with the big banks.  Keep a long position in equities (with a 3% weekly stop), and continue to hold your holdings in bonds as yields will be unstable until the inflation picture becomes clearer (hopefully in 2H24). 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 8th – 12th April 2024 

Highlights for the week

Mon: DE Trade Balance, DE Industrial Production

Tue: N/A

Wed: JP PPI, US CPI, CA BOC Interest Rate Decision, US FOMC Meeting Minutes, US Atlanta Fed GDPNow

Thu: CN CPI, CN PPI, EU ECB Interest Rate Decision, US PPI, US Jobless Claims, US Fed’s Balance Sheet

Fri: CN Trade Balance, UK GDP, UK Manufacturing Production, DE CPI, FR CPI, SP CPI, IN CPI

Performance Review

Index	29/3/2024	5/4/2024	WTD	YTD
Dow Jones	39,790.67	38,904.04	-2.23%	3.15%
S&P 500	5,255.30	5,204.34	-0.97%	9.73%
Nasdaq 100	18,248.15	18,108.46	-0.77%	9.46%
Euro Stoxx 50	5,083.42	5,014.75	-1.35%	11.12%
Nikkei 225	40,393.44	39,014.62	-3.41%	17.20%

Source: Google

InflectionPoint reports:

* A crazy week met its match in a crazy Friday. While everything is being rediscussed, the US Economy is powering ahead pretty much as usual (even though we should have had a recession 1 year ago or so), and interest rate decisions are dominating the picture while we await 1Q24 earnings, beginning this Friday with the big banks. Thursday’s fall was driven by the possibility of no rate cuts in the US this year (which I personally think is an exaggeration), but the picture of sticky inflation and of rates ‘higher for longer’ is almost complete. There is no question that everything is being shifted further, particularly in the US; and this brings some key questions for the ECB. Not only Europe is forecasted to ease before the ECB (chapeau Tom), with the first 25bp cut in June, but it might also have one more cut this year than its American counterparts (3 vs 2). The current conditions also make a cut in June unlikely, although I would hope this happens in the (late) July meeting because moving it to September would be taken negatively by the market, I think. As a result, the USD is still king – which is opposite to some expectations most market pundits had at the beginning of 2024. 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 with US CPI,  US PPI, US FOMC Minutes, and the banks, and the following two ones where some of the bellwethers will start to report (with flying star Nvidia slated to be the biggest earnings contributor to the S&P 500, according to FactSet). 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, with yields on the USD jumping again and in easy reach of 4.5%. 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 20.5x, which is tough to maintain with the current level of interest rates. Still long equities, long USD, 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, which is now facing the critical resistance of 152 vs the USD.

* Tough week for value – growth did do relatively better in a down week, which is not typical and surprising. It looks like the market’s mood was to sell the (recent) winners, except the Dow Jones. Japan fell because of the first hike by the BOJ since 2007 and because of the possibility that the Central Bank might increase rates again soon, well before October (which I believe is already in the prices and well digested by markets). The picture for rates is getting more complicated by a vibrant job market in the US – the nonfarm payroll once again surprised on the upside – and Chairman Powell has said that if inflation does not retreat (hard to do when the economy is firing on all cylinders) he will keep rates on hold for longer. The ECB might surprise in being the second major central bank (after the SNB) to ease rates in June – this will benefit the 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 by the end of this week 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 (2%). I now believe that the first Fed cut will happen in July (70%), instead of in June (52.3%). US CPI and US PPI this week will be key in determining inflation’s direction – with the current market conditions, it would be tough to expect inflation to moderate, which will reinforce the FOMC’s idea to hold rates for longer, possibly until September. After last week’s better-than-expected CPI, a move by the ECB could come as soon as in June. 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. 

* Yields on US 10-year Treasuries have reached 4.41%, with a stable increase last week; yields in Europe followed in the same fashion, and the EUR climbed slightly against the USD and is now hovering around 1.08. 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 3.2%, vs 5.7% on Dec 31st. The current forward P/E ratio for the S&P 500 is 20.5x – 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 243.71 little changed from 243.60 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 276.15.

* 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 2.5%, revised down from last week’s 2.8%, with the Blue Chips consensus around 2.0%. The latter’s Nowcast, which produces an annual forecast that is less volatile, saw a significant climb and now sees annual growth in 1Q24 at 2.25%, up from 1.87% last week, and up 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 2.62%, also significantly up from 2.21% last week. Earnings are expected to come in at 3.2% in 1Q24, compared with a forecast of 3,5% as of March 31st.  Revenue growth is faring even better, at 3.5% in 1Q24, vs 3.5% as of Mar 31st. For 2024, earnings growth is forecasted at 10.9%, vs 10.8% as of Mar 31st, with revenues coming in at 5.1%, vs 5.1% 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 64%, 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 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 the big banks reporting on Friday, Before Open as to the official start of reporting for 1Q24. 

Source: Earnings Whispers

Market Considerations

Source: FactSet, Goldman Sachs Global Investment Research, ISABELNET.com

Revenue growth estimates for 2024 are forecasted to grow by 5.1% (5.1% on Mar 31st) and earnings growth estimates for 2024 are predicted to grow by 10.9% (10.8% on Mar 31st), so the future looks bright. Introducing estimates for 2025, which sound again very positive, with revenue to grow by 5.9% (5.9% on Mar 31st) and earnings to grow by 11.6% (11.6% on Mar 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, July, or September. 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 between Trump and Biden. 

The highlight this week is the positive outlook for profit margins in the US once the first quarter is over. Recall that Goldman Sachs has an upbeat forecast on both GDP and earnings, and it was the improved profit outlook that led Chief US Strategist David Kostin to increase his year-end target for the S&P. That said, it can lead to positive guidance (often more important than the results themselves) and to earnings surprises in the rest of the year.

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 week there was a slide from the S&P, the Nasdaq 100, and the Nikkei 225, which all declined from 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 holding bonds as these reach higher yields (which should peak at 4.5%). 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 and 1H24 indeed came more slowly than expected. 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 holding your bonds, 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. Goldman Sachs’ Chief Global Strategist Peter Oppenheimer recommended overweight Japan in a recent video interview on Bloomberg TV.

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. No changes to the portfolios last week. 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

Consulting

Finally, I wanted to mention that I have officially become an Italian Independent Financial Consultant (Consulente Finanziario Autonomo), registered with the Italian OCF since 19 March 2024. If you are interested in my financial advice, or simply for more information, please contact me at giorgio.vintani@inflectionpoint.blog

Please kindly note that you must be based in Italy to avail yourself of this service

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.