US CPI surprises coming in below expectations; bond yields fall in the US and Europe. Equities have a positive week, albeit driven by value and rotation into small caps. Japan’s Nikkei 225 establishes a new all-time high before falling on Friday. ECB on Thursday will hold; watch out for EU CPI on Wednesday, and 2Q24 earnings reports in the US. 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 15th -19th July 2024

Economic data highlights of the week

Mon: JP – Markets Closed, CN Industrial Production, CN GDP (2Q24), CH PPI, US NY Empire State Manufacturing Index, US Fed Chair Powell Speaks

Tue: DE ZEW Economic Sentiment, EU ZEW Economic Sentiment, EU Trade Balance, US Retail Sales, CA CPI, US Atlanta Fed GDPNow (2Q24) 

Wed: IN – Markets Closed, UK CPI, UK PPI, EU CPI, US Industrial Production, US Capacity Utilisation 

Thu: JP Trade Balance, EU ECB Interest Rate Decision, US Philly Fed Manufacturing Index, US Jobless Claims

Fri: JP CPI, UK Retail Sales, DE PPI 

Performance Review

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Source: Google

InflectionPoint reports:

* Lower inflation, lower yields. The week started with an unexpected outcome for the French elections, with the coalition of the left parties as winners, Macron’s party not too far behind, and the RN third. This gave Macron the power to act as kingmaker, and to continue with the present PM at least after the Olympics. Going forward, it is possible that France will be governed by a coalition of centre, left, and right parties which allow the President to cut the most extremist parts of parliament. Later in the week, the biggest surprise came from US Inflation reports, with a lower-than-expected CPI sending bond yields down on Thursday, making an almost given Fed cut in September and raising the likelihood that the Fed cuts before the end of the year could be three instead of two. The PPI on Friday seemly failed to confirm the positive trend evoked by the CPI, but if we look at the Core PPI, then production prices seem to be broadly in check. Indeed, even Chairman Powell opened to possible cuts, saying that if done too late, these may harm the chance of supporting a slowing economy. This was the talk of the town last week – as people started to realise that even the mighty US Economy could be on the verge of slowing down, especially tech to be punished for it. It was a week in which value was the winner, and which was dominated by a rotation into small caps. This should be anyway taken as a vote of confidence for the economy, as small caps tend to prevail when growth is plentiful. In my eternal dilemma on whether to upgrade equities at this point, I decided that I would be a very poor strategist if I did it at this late stage. I should have followed David Kostin when he upgraded his target for the S&P 500 to 5,600, and that’s where we are now. Earnings are good, and now there is a perspective of a Fed tailwind for the back half of the year, but valuations and yields don’t allow me to be strongly constructive at this point, even though I still think that the market is very strong and it wants to go higher. As per the Fed, the call is getting 50/50 between 2 and 3 possible cuts from now until the end of the year, which would be something that, at least until last Thursday, wasn’t incorporated already in the current prices. 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. With 1Q24 officially over, the attention is moving towards 2Q24 which seems to be following in its footsteps with above-average earnings:  updating the forecast to a growth of 9.3%, versus estimates at June 30 of 8.9%. 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 21.4x, 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, 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, also last week, is still trading and is presently trading around 158, 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 it would be difficult to sidestep Vice President Kamala Harris, which could offer an even worse performance against Trump. 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. Last week value emerged as the winner, with the Dow being the best index for the week, after Japan destroyed what would have been a stellar performance with a very poor Friday. That might well be due to the BOJ intervention, though esteemed economist Mohamed El Erian believes that these only buy some time, but are unlikely to reverse the trend unless supported by interest rate hikes. Still, the Nikkei 225 managed to set a new all-time record last week before eventually falling on Friday. 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. 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 9.3% – above the June 30th estimate (8.9%). 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 21.4x 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 gave us a break last week, courtesy of the surprise CPI on Thursday. Still, we are well above 4% (4.19%), so don’t get too excited. As for the Fed, July is now in sight in 17 days or so. But one swallow does not make summer, so the chances of a cut are slim (read: next to nothing) at 6.2%. I now believe that the first Fed cut will happen in September (96.2%), which got a bump since the moderation in US inflation was made public last Thursday. Going forward the CME FedWatch tool sees a real chance of a second cut in November, with a 59.9% probability. Going forward to December, there are 53.8% chances of a third cut, which would bring the total reduction to 75 bp. 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 4.19% 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 1.09. I have decided to abandon my long USD call for the time being. The new Fed forecast sees both central banks possibly easing by a total of 75 bp this year, which would remove one of the driving forces behind the USD. Furthermore, the EUR has been strong lately, and I am beginning to suspect that much could be in the price already. 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 9.3%, vs 8.9% on June 3oth. The current forward P/E ratio for the S&P 500 is 21.4x – and while it is higher than the 5-year (19.3x) 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 243.77, in line with  243.74 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 278.84, in line with last week’s 278.80, 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 2.0%, up from a previous forecast of 1.5%, with the Blue Chips consensus down below 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 1.80%, compared with 1.79% last week, and down from 2.52% in March. Introducing a new 3Q24 forecast of 2.17%, up from 2.11% 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 2Q24 is 9.3%, compared with a forecast of 8.9% as of June 30th. Revenue growth is also faring well, at 4.8% in 2Q24, vs 4.7% as of June 30th. 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 Netflix (Thursday, After Close).

Source: Earnings Whispers

Market Considerations

Source: Haver Analytics, Datastream, Worldscope, Goldman Sachs Global Investment Research, ISABELNET.com

Source: BofA Global Investment Strategy, Bloomberg, 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, most likely in September. 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 60% chance to be reelected, vs 19% for the incumbent Joe Biden. 

Two highlights this week. The first is a chart from Goldman Sachs, which states that the market implied recession in the next 12 months is 36%, so a significant amount by historical standards. I would note, however, that is lower than what the Federal Reserve of Cleveland is forecasting, meaning that there are some mitigating factors beyond the still high yields. I wouldn’t be overly worried at this point, but it is something to bear in mind. The second chart from Bank of America puts in the spotlight the upcoming forecasts for rates, with now an almost unanimous consensus for a 25 bp rate cut at the September meeting. This forecast leaves open the chance of 3 possible cuts, which as I reminded you before, is very much 50/50 at this point. Let’s continue to watch the data for now.

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 mentioned before, it looks like President Macron in France has a few options for his next government. Let’s check its 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.