May NFP remind us that the US Labour market is alive and well; yields are initially down in the week then back up on the news. Good week for equities, back to recent records: earnings are good but valuations are hard to digest. Fed on hold, possibly until December: we’ll know more on Wednesday. Watch out for the US CPI (and the Fed) on Wednesday and the US PPI on Thursday. Still neutral on equities and bonds, and long USD. 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 3rd – 7th June 2024

Highlights for the week

Mon: CN, HK, AU – Markets Closed, JP GDP

Tue: UK Unemployment, BR CPI  

Wed: JP PPI, CN PPI, CN CPI, UK GDP, UK Manufacturing Production, DE CPI, IN CPI, US CPI, US Core CPI, US FOMC Economic Projections, US Federal Reserve Interest Rate Decision,

Thu: CH PPI, CN New Loans, EU Industrial Production, US PPI, US Jobless Claims, US Fed’s Balance Sheet

Fri: JP BOJ Interest Rate Decision, JP Industrial Production, FR CPI

Performance Review

Source: Google

InflectionPoint reports:

* And so we have the two rate cuts that were forecasted. Equity rallying to recent highs. Everything good? Unfortunately not. It just took a May NFP ahead of consensus to ruffle quite a few feathers. ECB Chairman Lagarde started the easing process but admitted that things are not as straightforward as they could seem, ruling out another cut in July and putting September in the balance. As for the Fed, the bond market repriced cuts once again to only one this year and in December (we’ll see in a bit the indications of the CME FedWatch Tool). While the unemployment rate did rise to 4.0% (again, a level which normally triggers Fed hiking, not easing!), the Average Hourly Earnings was higher than consensus, triggering once again inflationary pressures. We’ll know more this week, with the US CPI on Wednesday, right before the FOMC meeting, and the PPI on Thursday. The real danger, in the US at least, is that the Federal Reserve could meet a scenario where growth is not that strong, but inflation does not come down, hindering its efforts to start easing. The other troubling element is the seemingly unstoppable rise in government yields across the board, which certainly complicates the outlook for equities as well (valuations matter, sooner or later something has got to give). 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 99% of S&P 500 companies having reported) and the focus will turn back on economic data: it’s again CPI week. 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 20.7x, which is tough to maintain with the current level of interest rates. I thought long and hard on whether to change my forecast, particularly on Friday as the markets impressively digested the above consensus NFP, but eventually I am sticking to my guns, at least for now. Thus I’m confirming my current 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! 

* Early on it seemed this would be a wonderful week, with benchmark yields falling across the board and equities rallying, but all this came to an abrupt stop on Friday upon the US NFP data, with most progress completely erased (as in the case of Italy) or trimmed significantly (US, France). Were it not for the bond market, it would have been a textbook growth progress week, with the Nasdaq 100 shining once again, and almost reconquering the top of best market YTD. About Japan, it is very interesting to note that on Friday there will be an Interest Decision by the BOJ. While the Japanese bank is supposed to stay put for now, it will be interesting to hear what they say regarding the rest of the year, as they might want to increase rates to support the flailing yen. The Euro ceded some ground to the USD last week, closing around 1.08. With the Fed and the ECB still undecided about when to start to cut rates, and when to continue the process, most of the attention is focused on when they might start/continue: 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 5.9% – 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). Although I fret about being neutral when the market is rallying, I am also following Goldman Sachs’ Chief US Strategist David Kostin, whose year-end target for the S&P 500 is still 5200, and who is saying that earnings are good, but valuations will make it hard for the market to progress further from these levels. At 20.7x the multiple really feels stretched, especially with the current interest rates, and although there are some echoes of 1999 I don’t see it returning at 24x as it was then. Watch this space.

*  The rates’ angst is unfortunately still very much alive, and forecasts for the Fed to ease have been hammered on Friday. 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 – and chances of an easy are next to nothing (0.6%), but at least the chance of the hike disappeared. I now believe that the first Fed cut will happen in September (49.0%), but the call is getting to 50/50, with little or no chances for July (8.9%). Given the continuation of strong and inflationary labour market conditions, some market pundits believe that the FOMC might stick to its idea to hold rates for longer, possibly until December (85.5% – back to 50bp rate cut in 2024, but it’s very close – and, in the end, it could well be just 25bp). 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, for now.

* Yields on US 10-year Treasuries have reached 4.43% and were mostly coming down last week, with however a big 14bp jump on Friday, showing that the market does not believe that the process of disinflation is underway; yields in Europe followed in the same pattern 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 5.9%, vs 3.4% on March 31st and 5.1% on December 31st. The current forward P/E ratio for the S&P 500 is 20.7x – 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 244.73, revised upwards from 244.68 a week ago, which is not too far from the top-down consensus of 245 (Goldman Sachs 241, Morgan Stanley 239, J.P. Morgan 225, Bank of America 250). For reference, the current 2025 S&P 500 bottom-up earnings estimate is 279.06, also up from last week.

Source: FactSet

* After the dismal 1.3% reading of US GDP for 1Q24, we are looking to solid forecasts for 2Q24, according to Atlanta and New York Federal Reserve Banks, The former’s GDPNow model is forecasting growth of 3.1%, down from a previous forecast of 2.7%, with the Blue Chips consensus presently 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 downgrade and now sees growth in 2Q24 at 1.90%, compared with 1.76% last week, and down from 2.52% in March. Introducing a new 3Q24 forecast of 2.04. %While there is still no recession forecast in their model, up to one sigma, the most recent data is the weakest on record for 2Q24. Earnings are expected to come in at 5.9% 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 11.3%, vs 10.7% 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 (April 2025) 54.55%.

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 Oracle (Tuesday, After Week), because it will offer us a glimpse of how business was in April and May (due to a different fiscal year).

Source: Earnings Whispers

Market Considerations

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 11.3% (10.7% 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. 

The highlight this week is once again on positive seasonality during an election year. June, July, and August are the best months in the year of a Presidential Election. In his analysis that spans almost 100 years, Ryan Detrick finds that stocks were up 75% of the time, with an average performance of 7.3%. I would love to see yields going down before being more constructive on equities, particularly at these levels. The bond market can be a predictor of future inflation in its own way. 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 management 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 that 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.