Nvidia’s earnings were good, lifting the stock, the sector, and the index; bonds and yields are mostly on the way up. Another NFP is to come before the Fed’s June meeting; no change is expected until September. Now neutral on equities and bonds, and long USD. Watch out for the US GDP on Thursday, the US Core PCE Price Index on Friday, and the EU CPI on Friday.  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 27th – 31st May 2024 

Highlights for the week

Mon: US Memorial Day (Markets Closed), UK Bank Holiday (Markets Closed),  

Tue: JP BOJ Core CPI

Wed: DE CPI, US Beige Book 

Thu: CH GDP, US GDP, US Jobless Claims, US Fed’s Balance Sheet

Fri: JP CPI, EU CPI, US Core PCE Price Index, CA GDP, US Atlanta Fed GDPNow

Performance Review

Index	17/5/2024	24/5/2024	WTD	YTD
Dow Jones	40,003.59	39,069.59	-2.33%	3.59%
S&P 500	5,303.27	5,304.72	0.03%	11.85%
Nasdaq 100	18,546.23	18,808.35	1.41%	13.69%
Euro Stoxx 50	5064.14	5,035.41	-0.57%	11.58%
Nikkei 225	38,787.38	38,646.11	-0.36%	16.10%

 

Source: Google

InflectionPoint reports:

* Last week we were waiting for Nvidia to report, and – as usual – it did not disappoint, and reminded us that tech ain’t dead. This added more fuel to the fire, in a week that was dominated by growth and where value had to give back some of the recent gains. So far so good – but this week we’ll have a significant double test – US GDP on Thursday, and the favourite inflation measure by the Federal Reserve – US Core PCE Price Index – on Friday. Equally important and again on Friday is EU CPI – but the attitude of looking at these inflation numbers by the American and the European Central Banks could not be more different. In the US, FOMC member Kaskhari said that he wants to see several months of moderating inflation before eventually deciding to ease; while in the EU, Chief Economist Lane says that inflation will eventually reach its intended target (close, but below, 2%). Consequently, we must get ready for a decoupling of two of the most important central banks, with the ECB forecasted not only to cut rates earlier (as soon as June) than the Fed, but also to make 3 cuts vs 2/1 (at best!). We also had to record the opinion of Goldman Sachs’ CEO David Solomon, who (in disagreement with his Chief Economist) sees no cuts by the Fed this year and a clear possibility of a slowdown in the US. The upcoming data will certainly offer important insights about where we stand. Meanwhile, it’s useful to have a recap of the current forecasts on rates, courtesy of Nick Timiraos and the Wall Street Journal:

Source: The Wall Street Journal

US Earnings for 1Q24 were so far very good and above expectations, thanks in large part to EPS surprises; but the reporting season is now almost over (with 96% of S&P 500 companies having reported) and the focus will turn back on economic data: the Fed’s preferred PCE Price Index on Friday, May’s NFP, and then the FOMC’s Meeting and Q2 results. For the time being yields on the 10-year Treasuries have risen to 4.54% – watch these carefully as they are important in determining the market’s next moves. When I turned neutral on equities, I didn’t imagine inflation’s picture to (hopefully) become clearer in such a short time. While I don’t particularly enjoy being on the sidelines while markets are rallying, I am waiting for the May NFP to eventually make a decision to come back in. To most market pundits the (equities) markets feel extended, and rightly so – as on Friday the S&P 500’s multiple reached a level of 20.5x, which is tough to maintain with the current level of interest rates. Confirming my changed recommendations: neutral on equities and bonds, 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 feeling the pressure from most investors, despite the BOJ’s multiple attempts to stop the currency’s fall, and is now around 157, aiming for 160. Hedge for now and watch this space! 

* Driven by the unexpectedly positive April NFP and by positive earnings, most markets are revisiting their near-term highs. Earnings proved themselves by eventually beating their December 31st forecasts; positive momentum also helped. Europe had a break in a week in which most growth markets shone again – and the S&P 500 overtook it on a YTD. We have returned to a ‘normal’ growth market pattern, led by the Nasdaq 100 and with the special exception of Japan, which is still the leader. Never bet against America, says the Oracle of Omaha.  The complicated picture for rates has finally got one positive data point (said April NFP), but Chairman Powell will need more data points and confidence before cutting rates (in September?). The ECB might surprise in being the second major central bank (after the SNB) to ease rates in June – this should benefit the USD, although last week it didn’t, with the Euro just shy of 1.09. 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. The reporting season is almost over, and corporate America has shown an unexpected earnings growth of 6% – the highest since 1Q22. 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). Watch this space.

*  The rates’ angst is unfortunately very much alive. We are approaching the next FOMC meeting in June – which was once a serious contender for the Fed to begin easing and my previous forecast – is now not only completely gone (0.0%), but even showing a small possibility of a hike (0.9%, yikes!). I now believe that the first Fed cut will happen in September (44.9%), but the call is getting to 50/50, with little or no chances for July (10.2% – again, 0.8% chances of a hike). Let’s see if the strong US labour market conditions moderate further; there have been some green shoots (April NFP and last week’s Jobless Claims), but a swallow does not make summer. If not, the FOMC might stick to its idea to hold rates for longer, possibly until December (78.7% – 25bp rate cut in 2024). 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, watch out on Thursday for US 2Q24 GDP after the 1.6% climb in 1Q24 was deemed not to be a correct picture of the economy. 

* Yields on US 10-year Treasuries have reached 4.54%, and were mostly rising last week, showing that the market does not believe that the process of disinflation is underway; yields in Europe followed in the same pattern (watch out for the EU CPI on Friday) with the EUR losing some ground against the USD, now trading near 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 6.0%, vs 3.4% on March 31st and 5.1% on December 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 (19.2x) average and the 10-year average (17.8x), it is not cheap enough to withstand such high interest rates. I also note that the current high multiples are lifting the averages, and I consider the 10-year average to be much more of a truthful picture of the multiples the S&P 500 should trade in a normal situation (if there is ever one!) than the 5-years. (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 244.66, revised upwards from 243.99 a week ago, 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 278.84, also up from last week.

Source: FactSet

* After the dismal 1.6% reading of US GDP for 1Q24, we are looking to very solid forecasts for 2Q24, according to Atlanta and New York Federal Reserve Banks, The former’s GDPNow model is forecasting growth of 3.5%, down from a previous forecast of 3.6%, with the Blue Chips consensus presently slightly above 2.0%. As usual, one of the two will have to catch up with the other. The latter’s Nowcast, which produces a less volatile forecast, saw a mild uptick and now sees growth in 2Q24 at 2.04%, compared with 1.88% last week, and down from 2.52% in March. There is still no recession forecast in their model, up to one sigma. Earnings are expected to come in at 6.0% in 1Q24, compared with a forecast of 3.4% as of March 31st. Revenue growth is faring better, at 4.2% in 1Q24, vs 3.5% as of Mar 31st. For 2024, earnings growth is forecasted at 11.4%, vs 10.8% as of Mar 31st, with revenues coming in at 5.0%, vs 5.1% as of Mar 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, is presently (March 2025) 55.08%.

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. However, geopolitics and rates are likely to obscure everything for a while. Hang tight!

Earnings, What’s Next?

The reporting season is now coming to an end for 1Q24. Here is a snapshot of companies reporting next week. Highlights include Salesforce.com (Wednesday, After Close).

Source: Earnings Whispers

Market Considerations

Source: Datastream, I/B/E/S, Goldman Sachs Global Investment Research, ISABELNET.com

Source: Carson Investment Research, Ryan Detrick, ISABELNET.com

Revenue growth estimates for 2024 are forecasted to grow by 5.0% (5.1% on Mar 31st) and earnings growth estimates for 2024 are predicted to grow by 11.1% (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% (6.0% on Mar 31st) and earnings to grow by 14.2% (13.5% 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 September or December. 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. 

There are two highlights this week. The first one is on valuation, with the MSCI AC World plotted in the last 30 years. Once again, while not reaching the extremes of 1999-2000, the chart shows that the current valuation is expensive if matched against the recent (and not so recent) past. The 24-month forward P/E is particularly appealing, but I guess that the market will grow (and valuation will be higher) if the current earnings estimates are respected. The second chart, from Ryan Detrick, is a very useful reminder of one of the lessons learned with Prof. Elroy Dimson in his ‘Triumph of the Optimists’ – you must give time for your equity investment to flourish. (Prof. Dimson used a much wider sample, going back 100+ years, while Ryan Detrick’s analysis started in 1950). This is very useful when investing in an index, or a basket of stocks. Companies are much more volatile, unfortunately. And be careful not to fall into Buffett’s trap – he famously said that there were moments in which Berkshire Hathaway’s stock was down more than 50%, and nothing wrong was happening within the company at the same time. Timing and risk are key.

Due to the persistent stickiness of inflation, monetary policy is taking centre stage once again. Obviously, we should not overlook geopolitical scenarios (any escalation would be negative for the markets) 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). 

I now recommend a neutral position in equities, and a neutral position on bonds as these reach higher yields (which should peak at 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, one has to ask if the disinflation which we saw in 2H23 is still there – and for the Federal Reserve, seeing is believing. 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!

No changes last week. 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 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.