September labour report was very solid and above forecasts; upgrading equities to buy on the back of Goldman Sachs’ change in recommendation: their new target for the S&P 500 is 6,000. Cuts on 3Q24 earnings numbers are worrying, but we will soon see the results, starting this week with the big banks. Pay attention to US CPI on Thursday, and US PPI on Friday. Shift to caution (flight to quality) should Israel attack Iran. 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 – Markets Closed, DE Factory Orders

Tue: DE Industrial Production, US Atlanta Fed GDPNow (3Q24)

Wed: NZ RBNZ Interest Rate Decision, BR CPI, US FOMC Meeting Minutes

Thu: US CPI, US Jobless Claims, US Fed Balance Sheet

Fri: HK – Markets Closed, UK GDP, UK Manufacturing Production, DE CPI, US PPI

Performance Review

Source: Google

InflectionPoint reports:

* Last week the biggest news came on Friday, courtesy of the September labour report, which was extremely solid and above forecasts. That and Powell’s speech in which he said that the FOMC will lower interest rates ‘over time’, meaning that the American Central Bank is not in a hurry, completely exclude the possibility of another 50bp cut in November (We’ll see later what the CME FedWatch Tool is projecting). On Friday the previous week the PCE Price Index came in below expectations, but was not followed by the Core PCE Proce Index. This week we have the CPI and the PPI, and any signs of inflation has to be taken positively, now that Washington is set to ease rates. Anyway, the week was more eventful for bonds, which saw yields rising as a reaction to the strong jobs report, rather than equities, which were mostly (in the US) in line close to recent highs. 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.  It is very important to establish if the change in the US Monetary Policy can support the labour market as intended and avoid a recession; if so, this would be a very positive scenario for equities and a mildly positive scenario for bonds.

Source: Bloomberg Finance LP, NBER, Deutsche Bank, Financial Times

According to the chart above, we are in for a period of sustained equity performance, regardless of whether there will be a recession or not, even though I still think that it will indeed matter. Indeed, the biggest worries for (US) markets are three: recession, valuations, and US Elections. 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. Upgrading equities to buy, on the back of David Kostin’s raised target for the S&P 500 to 6,000 by end 2024, while keeping my other recommendations in line with last week: 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 now Goldman Sachs’ 6,000 – so there is a little space to upgrade, and while I feel the market wants to trade higher, I would jump at the opportunity to buy on any weakness. Maybe wait for October 7, the touted date for Israel’s attack on Iran, and if nothing happens buy (in line with your risk profile). Fasten your seat belts, and remember that volatility goes up and down (often very quickly). Watch out for any action by Israel after PM Netanyahu vowed to respond to Iran’s attack. 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. This is matched by Goldman Sachs’ own forecast for 2025. 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. Both candidates are sparring in swing states, with Pennsylvania often touted as a key state. At the moment Kamala Harris 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 growth, even though these markets didn’t make much progress, because of the weakness in Europe and in Japan (which was, once again, driven by the JPY).  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 4.2% – another downward revision – 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 it would make me uneasy to 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 driven up in the US, and the same broadly happened in Europe, where they were higher in the Core than in the Periphery. Yields on 10-year treasuries are at 3.96%, an increase of 21bp in just a week. 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 once again if data changes the opinion changes (or rather, adjusts in synch): there is no trace of a 50bp cut anymore, and there is a likelihood of 97,4% of a 25bp cut, which I think is what the Fed will do. Chairman Powell and his esteemed colleagues have done a great job of resetting expectations, as in December over 80% of chances point to another 25bp cut after November, bringing the forecasts in line with the FOMC’s assumptions. Going forward, there has been an adjustment on next year as well, as in December 2025 the consensus is to have rates at 3.25-3.50%, which implies another 100bp of reduction next year, in line with what economists are forecasting. Be wary of aggressive Fed cuts because they might signal an upcoming recession; non-recessionary interest rate eases are always welcome by equities. 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 ends in forecasts for the S&P 500 of 5,800, 6,300, and 6,800 which will certainly raise a lot of eyebrows. 

* Yields on US 10-year Treasuries have reached 3.96% and were mostly up last week, as were yields in Europe.  The EUR lost some of its gains against the USD, now trading below 1.10. I’m starting to think that most of the interest rates cuts in the US are already in the price, and the USD will continue to stay stable versus the EUR, buoyed by its strong economy. While in 1999 yields were even higher, and the Fed was hiking not easing, 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 4.2%, 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 240.60, lower than before due to estimates cuts to 3Q24 number, but still 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 276.28, signalling optimism for future earnings, in line with consensus at 277.

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 2.5%, down from a previous forecast of 3.1%, with the Blue Chips consensus just below 2%, but raising slowly. The latter’s Nowcast, which produces a less volatile forecast, was stable and now sees growth in 3Q24 at 3.06%, compared with 2.99% last week. It is interesting to note that the forecasts from the two Federal Reserve Banks were recently converging, even though these are not (yet) matched by the leading companies in the S&P 500. Earnings growth for 3Q24 is 4.2%, 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 9.8%, 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 open on Friday with the big banks. Here is a snapshot of companies reporting next week. The highlights are JP Morgan, Wells Fargo, and Blackrock (Friday, Before Open).

Source: Earnings Whispers

It is worth bearing in mind this chart from Goldman Sachs regarding the reporting season: the week after next will have some important reports, and the 2 weeks after that will be key, too.

Source: Goldman Sachs, ISABELNET.com

Market Considerations

Source: Goldman Sachs, ISABELNET.com

Source: BofA Global Investment Strategy, GFD Finaeon, Bloomberg, 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 9.8% (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 14.9% (14.5% on Jun 30th). As previously mentioned, the Fed has cut its rates by 50bp in September, and the trajectory is to continue easing. 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 50.8% chance to be reelected, vs 48.4% for Vice President Kamala Harris.

Two highlights this week. The first is a chart from Goldman Sachs which plots their new targets for the S&P 500 for this year and next, plotted close to earnings growth. Given that David Kostin did not increase earnings, that means he is confident with a stronger multiple of 24x+, lowered to 23.5x next year. If it does hold I can conclude that AI looks to be as important as the dot.com boom for the markets. The second from Bank of America shows that the Global Market Capitalisation has conquered its previous peak of October 2021. Up, up, and above? Barring any increase in risks from the geopolitical scenario (e.g. an attack of Israel on Iran), it would seem the most likely scenario.

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

I now recommend a long 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 could be possible, 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 the land of the rising sun persists, 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 three 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.