Value propels most equities higher; Nvidia good, but not good enough to lift Nasdaq to new highs. Bonds a little bit lower across the spectrum. Pay great attention to the August labour report coming this Friday, as it will guide the Federal Reserve in its easing process. Continue to keep equities at neutral: the storm has passed, but near term there’s limited room for further upside. The biggest tail risk is the US Economy falling into a recession (avg 30% chance in 2024), followed by adverse geopolitical outcomes, and elections – watch those in America in November very closely.

Major market events 2nd – 6th September 2024 

Economic data highlights of the week

Mon: US – Markets Closed, CA – Markets Closed, DE Manufacturing PMI, UK Manufacturing PMI

Tue: CH CPI, CH GDP, BR GDP, US ISM Manufacturing PMI, US Atlanta Fed GDPNow (3Q24)

Wed: AU GDP (2Q24), EU Services PMI, UK Services PMI, EU PPI, CA BoC Interest Rate Decision, US JOLTs Job Openings, US Beige Book    

Thu: DE Factory Orders, UK Construction PMI, EU Retail Sales, US ADP Nonfarm Employment Change, US Jobless Claims, US Services PMI, US ISM Non-Manufacturing PMI, US Fed Balance Sheet

Fri: EU Employment Change, EU GDP (2Q24), US Nonfarm Payrolls, US Unemployment Rate, US Average Hourly Earnings   

Performance Review

Index	23/8/2024	30/8/2024	WTD	YTD
Dow Jones	41,175.08	41,563.08	0.94%	10.20%
S&P 500	5,634.61	5,648.40	0.24%	19.09%
Nasdaq 100	19,720.87	19,574.64	-0.74%	18.32%
Euro Stoxx 50	4,907.85	4,957.48	1.01%	9.85%
Nikkei 225	38,364.27	38,627.50	0.69%	16.04%

Source: Google

InflectionPoint reports:

* Last week was dominated by Nvidia’s earnings –  good, but not good enough – and by the Fed’s preferred measure of inflation, the Core PCE Price Index, which came in a touch below consensus, paving the way for the US Central Bank to start easing in September. As long as the upcoming August labour report isn’t a disaster, we should be in for a reduction of 25bp on  September 18th. And I believe this will be the more constructive scenario – a strong economy and a decrease in rates. Starting with 50bp might indeed give the sense that the economy is in danger. The week also contained an update from Europe’s CPI, which at 2.2% is showing signs of progress and leaving room for the ECB to reduce rates further. Valuations and multiples are still the usual sore spot, as at 21.0x forward earnings there’s no room for error. On the plus side, interest rates are lower than before, which is one of the reasons that made such a strong bounce possible. Keeping my recommendations in line with last week: neutral on equities, positive on bonds, and positive on the CHF, which seems to be the only currency to go up no matter what. Equities to neutral means that, on one side, the danger and the damage inflicted by the crash are probably behind us; but on the other, there is not enough space to upgrade equities here to buy, even though I feel the market wants to trade higher. Fasten your seat belts, and remember that volatility goes up and down (often very quickly). The Oracle said it best: be greedy when others are fearful. 

* Still early days for the American Presidential election, with the race wide open, but what seemed a certain victory for Trump is now very much for grabs. Kamala Harris was reportedly in the lead or tied with Donald Trump in 7 of the swing states, but the two challengers have not yet had their first debate, scheduled on September 10th, and therefore these are still very much early days.  Clearly, last week was one for value, as Nvidia’s earnings failed to propel the Nasdaq 100 higher – and it is due to the market’s newfound strength in all its components if the Dow Jones Industrials and S&P 500 indexes did not fall further. Europe was the best market of the week, and Japan added to its tally to slowly recover the highs lost due to the JPY’s ominous rally. In the last week and month, there has been a slight erosion, but it is not enough to have confidence to say that the path to a further weakening of the Asian currency can resume. For 2Q24, the forecast for earnings growth is that they will increase by 10.9% – 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 21.0x the multiple feels stretched, and although there are some echoes of 1999 I don’t see it returning at 24x as it was then.

*  Everything in bonds has changed at the first hint of a slowdown in the US Economy, with yields below 4% for the first time this year (including the crash, of course). The Core PCE Price Index came in at 2.6%, a touch below expectations, but not enough to significantly change the trajectory of bond yields which have been slowly rising since the bottom of the crash. Yields on 10-year treasuries are at 3.91%, a slight increase in the last 7 days. Regarding the Fed, if data changes, forecasts will change too, and we are witnessing an enhanced base case scenario, where the 2, maybe 3 cuts in 2024 become 3, maybe 4. If there are massive cuts this can well mean that the economy is really endangered, and after the positive retail sales data, and a strong consumer confidence, nothing makes me think it is so. So let’s have a look and start with September. A 100% probability of a cut is confirmed, but there are 69% chances of a 25bp cut, leaving the door closed for more (but let’s wait for that August labour report on Friday). In November there has been a change, as the market is split 50/50 between another 25bp ease, and a more aggressive 50bp ease. In December it is very possible (69.1%) that the Fed will reach a reduction of 100bp since September, bringing rates to 4.25-4.50%, with a 50bp cut at that meeting. The forecast sees another 125bp of cuts delivered by December 2025. We need (lower) yields and (higher) earnings to support some of the highest multiples since my heyday (the fated 1999-2000), and at the same time we must ascertain the strength of the AI opportunity and that of the US economy.

* Yields on US 10-year Treasuries have reached 3.91% and were mostly going up last week. Yields in Europe followed in the same stride. The EUR kept its gains against the USD, now trading near 1.11, and further weakness is expected in case the Fed decides to go ahead with its ambitious rate cut plan, which definitely will be followed only to some extent by the ECB, raising the appeal of the Euro. The GBP followed in the same fashion, touching its highest levels in 2 years against the USD. 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, albeit gradually and not through a crash. Earnings for 2Q24 are currently estimated at 10.9%, vs 8.9% on June 3oth. The current forward P/E ratio for the S&P 500 is 21.0x – and while it is higher than the 5-year (19.4x) average and the 10-year average (17.9x), it is not cheap enough to withstand 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 242.42, down from 243.85 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 278.92, in line with last week’s 278.87, albeit signalling optimism for future earnings. The trim in 2024 earnings reflects the reduction in 2Q24 earnings growth from 11.5% to 10.9%.

Source: FactSet

* After a much stronger 3.0% reading of US GDP for 2Q24, we are looking to solid forecasts for 3Q24, according to Atlanta and New York Federal Reserve Banks, The former’s GDPNow model is forecasting growth of 2.5%, up from a previous forecast of 2.0%, with the Blue Chips consensus around 1.7%. The latter’s Nowcast, which produces a less volatile forecast, saw an upgrade and now sees growth in 3Q24 at 2.49%, compared with 1.94% last week, with an increase of as much as 0.6% due to the latest data releases. No recession forecast exists in their model, up to one sigma. It is interesting to note that the forecasts from the two Federal Reserve Banks are converging at this point in time. Earnings growth for 2Q24 is 10.9%, compared with a forecast of 8.9% as of June 30th. Revenue growth is also faring well, at 5.2% in 2Q24, vs 4.7% as of June 30th. For 2024, earnings growth is forecasted at 10.1%, vs 10.9% as of Jun 30th, with revenues coming in at 5.1%, vs 5.1% as of Jun 30th. 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 (July 2025) 63.14%. 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 is now drawing to an end. Here is a snapshot of companies reporting next week. The highlight is Broadcom (Thursday, After Close).

Source: Earnings Whispers

Market Considerations

Source: Deutsche Bank, Bloomberg Financial L.P., ISABELNET.com

Source: Goldman Sachs Global Investment Research, Department of Commerce, ISABELNET.com

Revenue growth estimates for 2024 are forecasted to grow by 5.1% (5.1% on Jun 30th) and earnings growth estimates for 2024 are predicted to grow by 10.1% (10.9% on Jun 30th), so the future looks bright. Introducing estimates for 2025, which sound again very positive, with revenue to grow by 6.0% (6.0% on Jun 30th) and earnings to grow by 15.3% (14.5% on Jun 30th). As previously mentioned, the Fed 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 52% chance to be reelected, vs 47% for Vice President Kamala Harris.

Two highlights this week. The first is a chart from Deutsche Bank, which highlights the performance of Real GDP in the US. After 2Q24’s revised rating of 3.0%, the performance over the last 12 months is the strongest recorded since the Federal Reserve began its hiking cycle.  the weakness of the USD took place side by side with new highs of the S&P 500. It is leading me to think that both will continue. The second chart from Goldman Sachs plots the progress for Core PCE Inflation, on the way to reaching the 2% Fed targets in the not-too-distant future due to inflation cooling. This raises the prospects for the US markets for the next 12 months.

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. And now it’s almost time for elections in America, with Trump and Harris neck to neck in polls.

I now recommend a neutral position in equities and a long position on bonds. 

There are three main headline risks to what is otherwise a constructive view for 2024: i) the US economy falling into a recession; 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. 

Japan managed to recover some of the damage done earlier by plans of the BOJ to turn aggressive to bolster the yen – which I believe went beyond their intentions. A senior official later issued more dovish comments. As you can’t fight the Fed, you can’t fight the BOJ either – my advice is to watch any downward moves by the yen to eventually establish another entry point. For the time being, the cautious stance on equities, until all the dust has settled, includes the land of the rising sun, unless there is more clarity on where the JPY is headed, particularly after the recent decisions by the country’s central bank.

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.

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.