European equities were hammered by President Macron’s decision to call for new elections in France; bonds (luckily) stayed put. Last week’s US CPI and PPI brought some respite in the US bond market: but is it enough for the Fed? (No!) SNB and BOE have Interest Rate Meetings on Thursday – both are expected to stay on hold. Nasdaq 100 new king of the hill YTD, driven by Oracle and Nvidia; multiples are very extended, even though S&P 500 targets continue to be raised. 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 – watch those in France very closely.

Major market events 17th – 21st June 2024

Economic data highlights of the week

Mon: ZA, IN, SG – Markets Closed, CN Unemployment Rate, CN Industrial Production, EU Wages in Euro Zone

Tue: AU RBA Interest Rate Decision, DE Zew Economic Sentiment, EU CPI, US Retail Sales, US Industrial Production, US Atlanta Fed GDPNow (2Q24) 

Wed: JP Trade Balance, UK CPI, UK PPI, NZ GDP

Thu: CN PBoC Loan Prime Rate, DE PPI, CH SNB Interest Rate Decision, UK BoE Interest Rate Decision, US Philly Fed Manufacturing Index, US Jobless Claims, US Fed’s Balance Sheet

Fri: SW, FI – Markets Closed, JP CPI, UK Retail Sales, DE Services PMI, EU Services PMI, UK Services PMI, US Servies PMI, US Manufacturing PMI, US Fed Monetary Policy Report 

Performance Review

Source: Google

InflectionPoint reports:

* Drama in Europe in what was otherwise a positive week. The old continent has two issues, both of which are nearly impossible to fix: a weak, deeply divided political scenario, and the absence of a lender of last resort. These would impact more bonds than equities, but shares were battered all week in what was otherwise a positive global week, led once again by US Big Tech and by the unstoppable Nasdaq 100. Battered without distinction – even the countries whose government received a vote of confidence (like Italy) were massively sold. The risk has been represented by the surprising decision of French President Macron to dissolve parliament and call for new national elections. This is a gamble that could have deep consequences inside and outside France, particularly if the Rassemblement National wins the relative majority of votes on June 30th and July 7th. There has never been a hint of Frexit, but this has the potential to demolish the entire European Union, in a way that would be more significant than Italy’s exit in 2011. Hilariously, Labour in the UK is potentially looking at the same time to develop closer ties with the bloc, albeit with the limitations of not joining the single market once again, and not joining the customs union either. I will continue to watch the political developments in Europe very closely; meanwhile, look to US, UK, or CH assets as safe havens from this political turmoil. I would not sell European assets at this point, but I would not be buying the dip either, at least until the storm (said French elections) is over. Last week we kicked off with a negative reading of the Japanese GDP, at -0.5% for 1Q24, in line with forecasts, albeit accompanied by a slumping GDP Price Index. Thus the Bank of Japan will likely stay put for a while. The very big news was the US CPI coming in below expectations at 3.3%, versus a forecast of 3.4%. This has prompted the market to revive expectations of two rate cuts by the end of the year (September and December in all likelihood), even though the Fed was unimpressed, and we are back watching the data. Please find an updated table, courtesy of Nick Timiraos and the Wall Street Journal, of the latest Fed Forecasts (please kindly note this chart was published before the latest CPI – we’ll check the CME FedWatch Tool later)

Source: The Wall Street Journal

The PPI last Friday mimicked the CPI in coming below expectations as well, with a negative -0.2% reading in May, which brings the YoY to 2.2%. It has to be said, however, that the market is presently driven by the rally in technology shares, rather than by the Fed’s possible cuts. 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), although last week they did come down a bit in the US, and in Europe, they were unfazed by the risk-off attitude which hit Equities. 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 over and the focus will turn back to economic data. 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 21.0x, a recent record, which is tough to maintain with the current level of interest rates. 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! 

* Elections hit the old continent, hard – for once it was equity holders to bear the brunt of the huge fall, while – believe it or not – French OATs saw their yields fall. The 10 to 1 split in NVIDIA of course added fuel to the fire and led the Nasdaq 100 to lead all indexes on a YTD basis, overtaking Japan. The Magnificent 7 market cap is now equal to 32% of the market cap of the S&P 500, the most ever. I hope these shares will consolidate, otherwise, there could be a dramatic fall like in 2000, even though we haven’t yet reached the valuation excesses seen then (which is a meager consolation). 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. The Euro ceded some ground to the USD last week, closing around 1.07. 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 for 1Q24, and corporate America has shown an unexpected earnings growth of 5.9% – the highest since 1Q22. For 2Q24, the forecast for earnings growth is that they will increase by 9.0% – in line with the March 31st estimate. 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 21x 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, even though there was a much needed respite last week, courtesy of the US CPI and PPI. Still, we are well above 4% (4.22%), so don’t get too excited. As for the Fed, June is gone, and here comes July in 40 days or so. But one swallow does not make summer, and so the chances of a cut are slim (read: next to nothing) at 12.4%. I now believe that the first Fed cut will happen in September (68.5%), but the call is getting to 50/50, with wild swings as new data is being published. 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 (95.5% – back to 50bp rate cuts 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, for now.

* Yields on US 10-year Treasuries have reached 4.22% and were mostly coming down last week, driven by the positive readings of the CPI and PPI (which of course are not enough for the Fed). Surprisingly, yields in Europe followed the same pattern, albeit with the EUR losing some ground against the USD, now trading near 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 2Q24 are currently estimated at 9.0%, vs 9.0% on March 31st. The current forward P/E ratio for the S&P 500 is 21.0x – 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 244.70, little changed from 244.73 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 279.42, up from last week, signalling optimism for future earnings.

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%, up 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 1.91%, compared with 1.90% last week, and down from 2.52% in March. Introducing a new 3Q24 forecast of 2.13, up from 2.04% last week. %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 growth for 1Q24 was 5.9%, compared with a forecast of 3.4% as of March 31st (and 5.1% as of December 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, What’s Next?

The reporting season is now coming to an end for 1Q24. Oracle reported wonderfully last week, and contributed to drive the Nasdaq 100 to new highs. Here is a snapshot of companies reporting next week. Most of the reports for 2Q24 will begin in about a month, starting with the big banks as usual.

Source: Earnings Whispers

Market Considerations

Source: Deutsche Bank, ISABELNET.com

Source: FactSet, Goldman Sachs Global Investment Research, 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 6.0% (6.0% on Mar 31st) and earnings to grow by 14.3% (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. 

Two highlights this week. The first is an updated forecast from Deutsche Bank, raising their year-end target for the S&P 500 to 5,500 driven by good corporate earnings. The second tells us who has been stealing the show: a revised version of MAGMA, with Nvidia replacing Apple (actually both companies are beyond $3Tn now – is this a passing of the baton?). Obviously, AI is a big driving factor in this. I would still echo the comments of Pope Francis at G7 when he said that man, not machine, has to have the last word (anyone oblivious of the consequences might watch the great oldie movie ‘War Games’ again). For equities, 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, not just in the US, where a new Trump presidency looks quite likely, but also in Europe, where in some countries is brewing extremism and discontent. 

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.