Slight losses for Equities; Japan shines boosted by the weak JPY; bond yields go up again. Uneventful Core PCE Price Index; still expect the Fed to cut in September and December. A disastrous debate by President Biden has left the Democratic camp wondering whether they should replace their candidate. Watch out for Chairman Powell’s speech on Tuesday, ADP NFP on Wednesday, and of course Non Farm Payrolls 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 – watch those in France very closely.

Major market events 1st – 5th July 2024

Economic data highlights of the week

Mon: CA, HK – Markets Closed, DE Manufacturing PMI, EU Manufacturing PMI, UK Manufacturing PMI, DE CPI, US ISM Manufacturing PMI,  US Atlanta Fed GDPNow (3Q24) 

Tue: EU CPI, EU Unemployment Rate, US Fed Chair Powell Speaks, US JOLTs Job Openings

Wed: US – Early Close 1pm, EU Services PMI, UK Services PMI, EU PPI, US ADP Nonfarm Employment Change, US Jobless Claims, US Services PMI, US FOMC Meeting Minutes  

Thu: US – Markets Closed, CH CPI, UK General Election, US Fed’s Balance Sheet 

Fri: US Nonfarm Payrolls, US Unemployment Rate, US Average Hourly Earnings 

Performance Review

–

Source: Google

InflectionPoint reports:

* Watching data is like a never-ending story, at least for the time being. The third revision of the US 1Q24 GDP was updated to 1.4%, and the much-awaited Core PCE Price Index came in bang in line at 2.6%, which won’t make the Federal Reserve too happy. Two weeks ago most of the AI stocks slided down from their peaks; last week their behaviour was much more muted, but other stocks within the Nasdaq (software) managed to rally, leaving the index little changed in a week in which – once again – yields crept up. At the time of writing, political elections are ongoing in France, and on Thursday it will be Britain’s turn. These are important as they will dictate the government’s priorities and their spending policies, which will impact their deficits and, consequently, their bond yields. This week we will have some very important data as it’s payrolls week, somehow overshadowed by the 4th July celebrations in the US. Equally important will be Chairman Powell’s speech on Tuesday, though I expect more of the same from him (inflation made some progress but it’s not enough to warrant a cut for the time being). Recently, a comment by a member of the FOMC seemed to go in the same direction, saying that the current policy has worked but has taken a lot of time in bringing inflation down (again, higher for longer). While I am NOT taking Friday’s NFP for granted, I note that last month the market was able to overcome a higher than expected job growth and end positive on the day. In my eternal dilemma on whether to upgrade equities or not at this point, I decided to … wait yet another week and watch the data, knowing full well that this is going to be the name of the game for the rest of the year. But as timing is often everything, I would like to make a sensible decision which is supported by at least some tailwinds (rates, and not valuations). It certainly irks and worries me that yields have began climbing once again. The best case scenario is that they will cut in September and in December by a total of 50bp. European markets had a quiet week after their washout due to political instability which happened a couple of weeks ago, but I am still in wait-and-see mode, even though the worst possible danger (the EU’s unraveling) should have been avoided. Please note that a Bloomberg Columnist wrote that it’s not impossible that, due to the political turmoil, the spread between France’s and Germany’s bonds can widen to match the current spread between Italy’s and Germany’s bonds – that would be an extreme measure, which could happen if Macron were to resign and leave the door open to new Presidential elections. I would wait until the end of the French elections (July 7) before becoming more positive on European assets (both bonds and equities); meanwhile, please look to US or CH assets as safe havens from this political turmoil. 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; were big tech’s loss of momentum to continue we could see a correction. 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. 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 has presently broken 160, on the way to 170. Hedge for now and watch this space! 

* In a week in which most of the news were about the disastrous evening President Biden had when matched to his fiery opponent, America has reminded us once again why it will continue to be the leading market, particularly if the AI opportunity proves to be as large as analysts think. As previously mentioned, the US, and technology, are not a ‘one trick pony’ but have multiple areas of strength, and software last week picked up the baton from semiconductors and the AI related themes. In terms of growth and value, only one market shone last week: the land of the rising sun, for which the weakening of the yen is acting as a strong tailwind, as the country is very strong in exporting, and the weak currency makes its products more competitive. With 2Q24 about to wrap up, there seem to be constructive forecasts for future earnings – but valuations always hang on in the balance, and sooner or later something has got to give.  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 8.8% – almost in line with the March 31st estimate (9.0%). 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 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 very much continued across the board last week, with the bond yields rising. We are well above 4% (4.39%), so don’t get excited. As for the Fed, June is gone, and here comes July in 30 days or so. But one swallow does not make summer, and so the chances of a cut are slim (read: next to nothing) at 10.3%. I now believe that the first Fed cut will happen in September (64.1%), 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 (93.8% – 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 4.39% and were mostly going up last week, despite the Core PCE Price Index coming in line. Yields in Europe followed the same pattern, albeit with the EUR gaining 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 8.8%, 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 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 1.4% 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 2.2%, down from a previous forecast of 3.0%, with the Blue Chips consensus down to 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 1.93%, compared with 1.89% last week, and down from 2.52% in March. Introducing a new 3Q24 forecast of 2.21%, up from 2.17% last week. While there is still no recession forecast in their model, up to one sigma, the most recent data is close to 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 4.3% 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 (May 2025) 59.76%. It has to be noted that, in the past, when the likelihood of recession was so high, one promptly ensued; at this point in time, however, the US Economy seems to be strong and steady. We shall see in due course, but I would think that either yields will break – or the economy will, at some point.

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 has now come to an end for 1Q24. Here is a snapshot of companies reporting next week. Last week FedEx reported incredibly well, while Nike wasn’t quite up to the challenge.  Most of the reports for 2Q24 will begin in about a couple of weeks, starting with the big banks as usual.

Source: Earnings Whispers

Market Considerations

Source: S&P, Bloombergm BofA US Equity & Quant Strategy, ISABELNET.com

Source: Carson Investment Research, Factset, 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 6.0% (6.0% on Mar 31st) and earnings to grow by 14.4% (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. According to Polymarket, at the time of writing Donald Trump has a 63% chance to be reelected, vs 21% for the incumbent Joe Biden. 

Two highlights this week. The first is a chart from Bank of America, which reminds us that the longer our holding period is, the less likely it is that we will face losses. It is important to state that this analysis has been made on the S&P 500 – the most successful of the large markets so far – and would not be valid for other markets, including those in Europe. There are also echoes of Prof. Elroy Dimson’s teachings in this: ‘equities are not safe over 10 years’. If I remember correctly (any mistake is obviously my own) he was advocating a 20-year holding period for equities to deliver i) a positive return and ii) one that would outpace that of 10 year bonds from the same country. The brilliant Ryan Detrick in the second chart reminds us that not all hopes are lost after a 10% rally in the S&P 500 in the first six months of the year: in 65% of cases a positive, incremental return was delivered in the following three months, and in 83% of cases in the rest of the year. 

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 with 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. 

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. Tom and I are discussing if to go more defensive on the Global Equities Portfolio. 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.