The sky’s the limit for Equities: S&P 500 and Nasdaq 100 make new all-time record highs. No big disruptions from the elections, as Labour won in the UK and the New Popular Front is forecasted to win in France. Watch out for Chairman Powell’s Humphrey-Hawkins testimony on Tuesday, US CPI on Thursday, and US PPI 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 America in November very closely.

Major market events 8th -12th July 2024 

Economic data highlights of the week

Mon: FR – Election Results (2nd Round),  DE Trade Balance 

Tue: US Fed Chair Powell Testifies

Wed: JP PPI, CN CPI, CN PPI, US Fed Chair Powell Testifies, US Atlanta Fed GDPNow (2Q24)   

Thu: UK Manufacturing Production, UK GDP, DE CPI, US CPI, US Jobless Claims

Fri: FR CPI, SP CPI, IN CPI, US PPI, US Michigan Consumer Sentiment 

Performance Review

Index	28/6/2024	5/7/2024	WTD	YTD
Dow Jones	39,118.86	39,375.87	0.66%	4.40%
S&P 500	5,460.48	5,567.19	1.95%	17.38%
Nasdaq 100	19,682.87	20,391.87	3.60%	23.26%
Euro Stoxx 50	4,894.02	4,979.39	1.74%	10.34%
Nikkei 225	39,583.08	40,912.37	3.36%	22.90%

–

Source: Google

InflectionPoint reports:

* Up, up, and away. Bond yields finally fell (a bit, don’t get too excited) across the board last week, and this prompted many markets – including the usual suspects, the S&P 500, and the Nasdaq 100, to new all-time highs. To achieve this in a payroll week and in an election week (UK and France) is no mean feat. We are now back to watching the economic data, with US CPI and US PPI on Thursday and Friday, and on Friday we’ll have the official kick-off of 2Q24 results – the following three weeks will be important as will get us an indication of how are things in techland (and in other sectors too). Amid a choppy (but positive still!) week for Nvidia, other stocks came to the ‘rescue’ and propelled the Nasdaq 100 to a new record. We started the week with EU CPI coming in at 2.5%, with the core up a tick at 2.9%, and comments from ECB Chair Christine Lagarde and US Fed Chair Jay Powell from Sintra; while both acknowledged good progress on inflation, they said that it was too early to continue (for the ECB) or start (for the Fed) cutting interest rates. JOLTs new job openings were a bit higher than forecasted and while ADP payrolls and Jobless Claims showed some moderation in America’s hot labour market, these were somehow echoed by last Friday’s NFP, with an unemployment rate which ticked up to 4.1% and, importantly for the Fed, a slight decrease in average hourly earnings, which came in at 3.9% in line, but down from an earlier 4.1%. UK Elections ended up pretty much as forecasted, with a Labour landslide. Still, the apparent honeymoon period greeting a new government started with sensible spending goals by PM Keir Starmer and his Chancellor Rachel Reeves. Watching data is like a never-ending story, at least for the time being. At the time of writing, elections are ongoing in France, but it looks like an absolute majority for the RN has been avoided, likely to be supplanted by a centre-left coalition. News from Bloomberg mentions that the French Left is set for a shock parliamentary election win; in this case, watch how much power Jean-Luc Mélenchon has, as he and his France Insoumise would want to increase public spending way ahead of last year’s deficit of 5.7%, for which France received a reprimand from the EU Commission. Anyway, it looks like the French electors have voted for sensible, mainstream parties, and if the early results are confirmed, then it’s safe to step into Fremche and European Assets. Still, don’t forget the roaring US and the land of the rising sun, which have achieved the best results YTD. In my eternal dilemma on whether to upgrade equities or not at this point, I decided to – once again – kick the can down the road, wait for a final week, and watch the data. Hopefully, the June CPI, PPI, and the first reports for the big banks will offer enough confidence for me to make my move. As per the Fed, the best-case scenario is that they will cut in September and in December by a total of 50bp. It has to be said, however, that the market is presently driven by earnings and 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 (5.9%) and above expectations (3.4%), thanks in large part to EPS surprises; while earnings for 2Q24 seem to follow the same trend at 8.8%.  To most market pundits the (equities) markets feel extended, and rightly so – as on Wednesday the S&P 500’s multiple reached a level of 21.2x, 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! 

* While discussions regarding a potential replacement of President Biden will continue, it looks as though he managed to reduce the gap in most ‘swing states’ in positive news for the Democratic camp. Meanwhile, 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. Clearly, last week was for growth to win, led by the Nasdaq 100’s steamrolling performance, followed closely by Japan (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. For now, we can probably put our hearts to rest that the cuts we want so much won’t happen in July on both sides of the pond. For 2Q24, the forecast for earnings growth is that they will increase by 8.8% – almost in line with the March 31st estimate (9.1%). 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 21.2x 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 very much into play, even though last week saw a respite from current high yields. We are well above 4% (4.27%), so don’t get excited. As for the Fed, June is gone, and here comes July in 23 days or so. But one swallow does not make summer, and so the chances of a cut are slim (read: next to nothing) at 7.8%. I now believe that the first Fed cut will happen in September (76.9%), 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 (96.4% – 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 4.27% and were mostly going down last week. Yields in Europe followed the same pattern, albeit with the EUR gaining 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 2Q24 are currently estimated at 8.8%, vs 9.1% on March 31st. The current forward P/E ratio for the S&P 500 is 21.2x – and while it is higher than the 5-year (19.2x) average and the 10-year average (17.9x), 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). I can only hope that the adjustment from the current high multiples back to the average will be gradual because if the year 2000 is to be a guide, we face three years of hell in the process. Introducing a 2024 S&P 500 bottom-up earnings estimate of 243.74, down from 244.70 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 278.80, down from last week’s 279.42, albeit 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 1.5%, down from a previous forecast of 2.2%, with the Blue Chips consensus down to 2.0%. As usual, one of the two will have to catch up with the other, though it’s surprising and unusual to see the Atlanta Fed’s forecast below the Blue Chips consensus (usually it’s the other way around). The latter’s Nowcast, which produces a less volatile forecast, saw a downgrade and now sees growth in 2Q24 at 1.79%, compared with 1.93% last week, and down from 2.52% in March. Introducing a new 3Q24 forecast of 2.11%, down from 2.21% 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 11.2%, 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 for 2Q24 will start in earnest on Friday with the big banks. The next three weeks will be very important to see how companies have faced a projected slowdown in GDP growth in 2024. Here is a snapshot of companies reporting next week. Highlights include J.P.Morgan Chase (Friday, Before Open), and Citi (Friday, Before Open).

Source: Earnings Whispers

Market Considerations

Source: BofA Global Investment Strategy, Bloomberg, ISABELNET.com

Source: MarketDesk, Mike Zaccardi, 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 11.2% (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 16% for the incumbent Joe Biden. 

Two highlights this week. The first is a chart from Bank of America, which reminds us that June was the first month since October 2020 not to have a rate hike worldwide. It looks like the cycle of hikes has been largely completed, but when will the cuts come, and will they be enough to re-boost the flagging economy? The second chart from MarketDesk reminds us that the S&P 500 is priced for perfection – I was happy while economic forecasts for the near future were still strong, but I am noticeably less happy now and wonder what will happen if the 2Q24 results won’t be as solid as expected. (The answer is that the market will go down, by how much no one knows). A famous John Maynard Keynes quote comes up to mind: ‘The market can stay irrational longer than you can stay solvent’. Fasten your seat belts …

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). As far as the elections go, in the UK, Labour won by a landslide and seems to have appointed a competent and prudent Chancellor in Rachel Reeves. As I finish these thoughts, it looks like Jean-Luc Mélenchon and the left have won the elections and the greatest number of seats, albeit without an absolute majority so much craved by the National Rally. Let’s check their spending plans carefully; bond vigilantes will be around in case of a Liz Truss redux, with French dressing, of course.

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 whether 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.