China injects stimulus into its ailing economy to equities’ cheer, particularly in Europe and Japan. Bonds yields stable in the US, while going down in Europe, with French 10-year yields surpassing Spain’s for a short while last week. Very important data this week with the August labour report on Friday; keep an eye on ADP report on Wednesday, too. Shift to caution should Iran attack Israel. Continue to keep equities at neutral, near term there’s limited room for further upside, and uncertainties (US Elections) abound. 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 30th September – 5th October 2024

Economic data highlights of the week

Mon: CN Manufacturing PMI, UK GDP (2Q24), DE Retail Sales, DE CPI, US Chicago PMI, US Fed Chair Powell Speaks

Tue: CN, HK – Markets Closed, EU CPI, US Manufacturing PMI, US ISM Manufacturing PMI, US JOLTs Job Openings, US Atlanta Fed GDPNow (3Q24)

Wed: IN, CN – Markets Closed, EU Unemployment Rate, US ADP Nonfarm Payrolls

Thu: CN – Markets Closed, CH CPI, UK Services PMI, EU PPI, US Jobless Claims, US Services PMI, US ISM Non-Manufacturing PMI, US Fed Balance Sheet

Fri: CN – Markets Closed, UK Construction PMI, US Nonfarm Payrolls, US Average Hourly Earnings, US Unemployment Rate

Performance Review

Source: Google

InflectionPoint reports:

* Last week equities made further progress, and the big news (clearly not discounted by the markets) was China’s decision to support its economy. Equities in Europe and Japan jumped at the announcement, while the US continued steadily, with the Nasdaq 100 closing above 20,000 once again. With the world’s major central banks presently in easing mode (taking into account the notable exception of Japan) the question is whether the underlying economy(es) will continue to hold and allow a continuation of the current expansion phase which started after Covid dominated the news for a few years. This week we’ll have more important data from the August Labour Report, which can shed important light on how hiring is ongoing in America after a few signs of softness have been spotted recently (including last week’s Consumer Confidence). It is very important to establish if the change in the US Monetary Policy can really support the labour market as intended and can avoid a recession; if so, this would be a very positive scenario for equities, and a mildly positive scenario for bonds. Indeed, the biggest worries for (US) markets are three: recession, valuations, and US Elections. It has been rumoured that due to divergent fiscal policies on corporate tax, Trump would add 5% to 2025 EPS, while Harris would subtract the same amount. Even though the downward path for 2024 has now been widely telegraphed, we are back to watching the data, especially as this Fed is way more data-dependent than it has been in the past.    Valuations and multiples are still the usual sore spot, as at 21.4x 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. I would point out that interest rates are now acting as a recession barometer: the more they fall the more a recession is likely, and the more they rise (while being below 4%) that is a sign of no recession and steady as she goes for the economy. A similar consideration can be made for USD/JPY – the Yen tends to rise in the event of a US recession and tends to decline on good signs for the economy. 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. The highest forecast for the S&P 500 is Deutsche Bank’s 5,750 – and once again we are already there (almost). 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). Watch out for any action by Iran after Israel’s attacks on Hezbollah in Southern Lebanon as these can indeed spook the markets. According to industry analysts, Factset offers a new, bottom-up perspective on the S&P, which could grow by 9% next year to approximately 6,300 points. However, please note that the next move will be down, not up, according to this chart. Watch out.

Source: FactSet

* Still early days for the American Presidential election, with the race wide open, but what seemed a certain victory for Trump when the challenger was the current president Joe Biden, is now very much for grabs.  Kamala Harris did perform admirably in the debate and has acquired credibility and support after the Democratic convention which was unthinkable just two months ago. At the moment she looks like the frontrunner and is ahead in some key swing states votes, although you should never take a Trump defeat for granted. We can call last week’s rally a triumph for value, driven by a jump in the Shanghai stock market following their new policy decision. Japan had a very remarkable week on the back of a depreciation of the JPY, which was sharply overturned on Friday by the appointment of Shigeru Ishiba as its new Prime Minister. I still believe that further upside of the Japanese index needs a further weakening of the currency, which might not happen for a while as the newly appointed PM benefits from an initial ‘honeymoon’. For 3Q24, the forecast for earnings growth is that they will increase by 4.6% – below the June 30th estimate (7.8%). 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 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. Last week yields were mostly stable in the US, and declining in Europe, with the French 10-year OAT’s yield surpassing for the first time since 2011 that of its Spanish counterparts. Yields on 10-year treasuries are at 3.75%. As mentioned, the Fed has telegraphed 50bp of further reduction in 2024; the problem might be in 2025, in which the (futures) market sees a higher degree of moderation than that forecasted by economists. Let’s start with November, and much to my surprise the CME Fed Watch tool is split in between a 25bp cut (47.2%) and another 50bp cut (52.8%). In December, there is only a 21.6% chance that the Fed scenario will come true (assuming a 25bp cut in November) – 50% see a 75bp cut between November and December, bringing the total reduction this year to 125bp, and 28.8% see a 100bp cut between November and December, bringing the total measure of accommodation to 150bp. Be wary of aggressive Fed cuts because they might signal an upcoming recession; non-recessionary interest rate eases are always welcome by equities. The outlook for 2025 sees 150bp of further cuts, out of the base case that the range for Fed Funds will end the year at 4.25-4,50%, and is well ahead of what is currently forecasted by economists. It looks like expectations are driving the Fed to lower rates much more quickly than envisaged. One has to wonder if the markets will sulk should they not get what they want.  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, even though a respected strategist as Ed Yardeni is now using a 21.0x P/E on its S&P 500 targets for 2024, 2025 and 2026, which will certainly raise a lot of eyebrows. 

* Yields on US 10-year Treasuries have reached 3.74% and were mostly stable last week; yields in Europe were mostly down.  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, on the back of the Fed Jumbo cut opposed to the BOE’s hold. 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 4.6%, vs 7.8% 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 (19.5x) average and the 10-year average (18.0x), 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 242.21,  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 278.41, albeit signalling optimism for future earnings. 

Source: FactSet

* After a weaker 2.4% 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 3.1%, up from a previous forecast of 2.9%, with the Blue Chips consensus just below 2%. The latter’s Nowcast, which produces a less volatile forecast, was stable and now sees growth in 3Q24 at 2.99%, compared with 3.01% last week. It is interesting to note that the forecasts from the two Federal Reserve Banks are converging at this point in time, even though these are not (yet) matched by the leading companies in the S&P 500. Earnings growth for 3Q24 is 4.6%, compared with a forecast of 7.8% as of June 30th. Revenue growth is doing better, at 4.7% in 3Q24, vs 4.9% as of June 30th. For 2024, earnings growth is forecasted at 10.0%, vs 11.0% as of Jun 30th, with revenues coming in at 5.0%, vs 5.1% as of Jun 30th. Finally, it’s worth noticing that the chance of a recession in the next 12 months, as calculated from the yield curve, according to the Federal Reserve Bank of Cleveland, is presently (August 2025) 59.82%. 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 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 3Q24 has just started and will continue next week with the big banks. Here is a snapshot of companies reporting next week. The highlight is Nike (Tuesday, After Close), which has just changed its CEO.

Source: Earnings Whispers

Market Considerations

Source: Goldman Sachs Global Investment Research, ISABELNET.com

Source: Topdown Charts, LSEG, ISABELNET.com

Revenue growth estimates for 2024 are forecasted to grow by 5.0% (5.1% on Jun 30th) and earnings growth estimates for 2024 are predicted to grow by 10.0% (11.0% on Jun 30th), so the future looks bright. Introducing estimates for 2025, which sound again very positive, with revenue to grow by 5.9% (6.0% on Jun 30th) and earnings to grow by 15.2% (14.5% on Jun 30th). As previously mentioned, the Fed has cut its rates by 50bp in September, and the next move will be down. 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 49% chance to be reelected, vs 50% for Vice President Kamala Harris.

Two highlights this week. The first is a chart from Goldman Sachs which highlights that ROE, almost at an all-time high, has been mostly stable this year. This might indeed make valuations more sustainable, as long as it does not fall off a cliff. I would also note that in 1999-2000 ROE was not that high and it touched a peak for a short period before going down. This time is different? Afraid we never really know. The second chart from Topdown charts testifies to the instability of October in an election year (which could well overspill in November if Harris wins and Trump does not concede). The overall return is positive, but the worst haunts me, as it is the worst monthly performance ever (in the timeframe considered). Therefore on a tactical basis, I remain neutral, ready to upgrade on any pullback.

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 with Iran now vowing to avenge the death of Hezbollah’s leader Hassan Nasrallah.  (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. President Macron appointed veteran politician Michel Barnier as Prime Minister but bond vigilantes are skeptical about the country’s spending plans, and put their 10-year yields above Spain’s. 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.