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First 3Q24 reports ok; earnings to flow through in the next three weeks. Equities end the week up, while bonds down, due to a CPI slightly above forecasts and the recession scenario fading away. Watch out the data on Thursday: EU CPI and EU ECB Interest Rate Decision (-25bp), counterbalanced by the US Philly Fed Manufacturing Index and Retail Sales on the other side of the pond. Trump takes a noticeable advantage over Harris with less than 1 month to go. Shift to caution (flight to quality) should Israel attack Iran. The biggest tail risk is the US Economy falling into a recession (35% chance in 2025), followed by adverse geopolitical outcomes, and US elections.

Major market events 14th October – 18th October 2024 

Economic data highlights of the week

Mon: JP, CA – Markets Closed, CH PPI, IN CPI

Tue: UK Unemployment, FR CPI, SP CPI, EU Industrial Production, CA CPI

Wed: UK CPI

Thu: JP Exports, EU CPI, EU ECB Interest Rate Decision, US Philly Fed Manufacturing Index, US Retail Sales, US Jobless Claims, US Atlanta Fed GDPNow (3Q24), US Fed Balance Sheet

Fri: JP National CPI, CN Unemployment Rate, CN GDP (3Q24), UK Retail Sales

Performance Review

Index 4/10/2024 11/10/2024 WTD YTD
Dow Jones 42,352.75 42,836.86  1.14% 13.58%
S&P 500 5,751.07 5,815.03 1.11% 22.61%
Nasdaq 100 20,035.02 20,271.98 1.18% 22.54%
Euro Stoxx 50 4954.94 5,003.92  0.99% 10.88%
Nikkei 225 38,635.62 39,605.80  2.51% 18.98%

Source: Google

InflectionPoint reports:

* The big banks set the tone for 3Q24’s early reporting, and in a positive way. The next three weeks will be very important as a very significant part of the S&P 500 > 70% will report. The US CPI was a little bit ahead of consensus, so once again there is no chance of more jumbo cuts by the Fec, which will continue traditionally by 25bp increments, slow and steady. Even though the official data call for a 3Q24 earnings growth by 4%, Factset anticipates (and I agree) earnings growth in the region of 7% in the same period, thus pushing further out the spectre of recession which from time to time makes an (unwelcome) appearance. With less than a month to go before the November 4th elections in the US, Tom is out with a post which focuses on Trump’s advantage over Kamala Harris, both as a probability of victory and in the swing states. While it remains to be seen whether it will be a Republican sweep, we can say that a Trump presidency would probably be better for (US) equities than for bonds, with a major focus on the Middle East and Asia and away from Ukraine. Bonds eventually surprised in the last two weeks with yields returning over 4% once again; even though this decline in prices was positive for equities, as it pushes out the likelihood of a recession, certainly wasn’t welcome by bond holders. 

 La

Source: Polymarket.com

Source: Tom Baldacci, LinkedIn

Remember that we talked about Trump being better for equities as his campaign (which can only be enacted if there is a Republican sweep?) includes a cut in corporate taxes and a boost of 5% to 2025 EPS. 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 essential 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. Indeed, the biggest worries for (US) markets are: 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. 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 decline on good signs for the economy. Confirming equities as buy, on the back of David Kostin’s raised target for the S&P 500 to 6,000 by the end 2024, while keeping my other recommendations in line with last week: moderately 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. 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. 

Source: FactSet

* Having just spoken about the US elections, which will be more and more relevant as we count the days to Nov 4th, last week was an even one between value and growth, with Japan being the real winner (buying the dips seems to work in the land of the rising sun as well, if you think of the disastrous -14% in one day after the BOJ’s change in monetary policy). The JPY did not make much inroads last week, as it was flat/slightly down, but decreased nearly 5% in the last month against the USD. Once again, keep an eye on the currency to see when could be a good moment to step in Japanese equities. For 3Q24, the forecast for earnings growth is that they will increase by 4.1% – another downward revision – below the September 30th estimate (4.4%). 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. That said, some notable strategists (David Kostin and Ed Yardeni) have been using a multiple north of 20+ in order to make their targets for 2025 and 2026; in my own base case at the turn of 1999 I also used the current multiple (24x) forecasting that it could hold – in fact, it didn’t. The story is different now, and the excesses of Akamai trading at 180x forward revenue (Jan 2000) are no longer seen, but still … Be careful out there when the S&P’s multiple begins with a 2. For now, there’s no other alternative to go with the flow(s).

*  It just took one strong labour report (September) to send recession packing and bond yields up through 4%, and last week was no exception, with bonds lower across both sides of the Atlantic. Yields on 10-year treasuries are at 4.07%, an increase of 11bp 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 89.5% of a 25bp cut, which I think is what the Fed will do, with a 10.5% possibility of no cut (which would be taken very badly by the markets). 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 for 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 4.07% and were mostly up last week, as were European government bond yields.  The EUR lost some of its gains against the USD, now trading above 1.09. I’m starting to think that most of the US interest rate cuts 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 4.1%, vs 4.4% on September 30th. 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 a much more 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 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% final 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 3.2%, up from a previous forecast of 2.5%, with the Blue Chips consensus just below 2%, but raising slowly. The latter’s Nowcast, which produces a less volatile forecast, was stable and shows growth in 3Q24 at 3.10%, compared with 3.06% last week. It is interesting to note that the estimates from the two Federal Reserve Banks are converging, even though these are not (yet) matched by the leading companies in the S&P 500. Earnings growth for 3Q24 is 4.1%, compared with a forecast of 4.4% as of September 30th. Revenue growth is doing better, at 4.6% in 3Q24, vs 4.7% as of September 30th. For 2024, earnings growth is forecasted at 9.7%, vs 9.9% as of September 30th, with revenues coming in at 5.0%, vs 5.0% as of September 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 must 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 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 Netflix (Thursday, After Close), Procter & Gamble, and American Express (Friday, Before Open).

Source: Earnings Whispers

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

Source: Goldman Sachs, ISABELNET.com

Market Considerations

Source: Topdown Charts, LSEG, ISABELNET.com

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

Revenue growth estimates for 2024 are forecasted to grow by 5.0% (5.0% on September 30th) and earnings growth estimates for 2024 are predicted to grow by 9.7% (9.9% on September 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 September 30th) and earnings to grow by 14.9% (15.0% on September 30th). As previously mentioned, the Fed cut its rates by 50bp in September, and will 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, it will be important 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 is well ahead with a 53.8% chance to be reelected, vs 45.4% for Vice President Kamala Harris.

Two highlights this week. The first is a chart from Topdowncharts which reminds us that most of the market pundits are banking on further climbs for the S&P 500, led by a strong economy. The current level of 1.0 on the Euphoriameter echoes once again 1999-2000; while there was a market correction following those excesses, it was caused by the infamous Intel preannouncement and by companies not being able to live up to their own hype. Since then, however, there have been solid gains – yes, 25 years have gone by – how time indeed flies. The second chart from Goldman Sachs points us to a 35% probability of a recession for next year; considering that this year’s was billed at 30% I don’t think it’s too bad. The New York Fed currently has a 2.75% forecast for 4Q24, so barring a war or a nuclear disaster (God forbid!) we can rule out a recession happening in 2024. And next year with a 15% growth in earnings, even with an extended multiple, is looking good.Up, up, and above? Barring any risk increase 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 again taking centre stage. 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). 

I now recommend a long position in equities and a moderately long position in 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 Tom and I 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. The third one is on Italian Equities. 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.

 

 

 


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