Equity mostly down, Bond yields rise very meaningfully, a weaker Euro trades down vs USD. Lots of data and earning reports this week – a key moment to assess near-term potential before the US election, where Donald Trump seems to have a significant advantage over Kamala Harris. Wednesday and Friday are key days on the economic front, with GDP data and the October labour report. This week Alphabet (Tuesday), Microsoft and Meta (Wednesday), Amazon, and Apple (Thursday) will all report earnings. Shift to caution (flight to quality) should the conflict in the Middle East escalate. 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 28th October – 1st November 2024

Economic data highlights of the week

Mon: NZ, GR – Markets Closed

Tue: US JOLTs Job Openings (Sep), CB Consumer Confidence, US Atlanta Fed GDPNow (3Q24) 

Wed: AU CPI, FR GDP (3Q24), SP CPI, SP GDP (3Q24), DE Unemployment, IT GDP (3Q24), DE GDP (3Q24), UK Autumn Forecast Statement, EU GDP (3Q24), US ADP Nonfarm Employment Change, US GDP (3Q24), DE CPI

Thu: SG – Markets Closed, JP Industrial Production, CN Manufacturing PMI, JP BOJ Interest Rate Decision, FR CPI, FR PPI, EU CPI, US Core PCE Price Index, US Jobless Claims, CA GDP (3Q24), US Fed Balance Sheet

Fri: SW – Early Close, IN – Markets Closed, US Nonfarm Payrolls, US Unemployment Rate

Performance Review

Source: Google

InflectionPoint reports:

* Is Inflation making a comeback in the US? Judging from the jump in yields, yes. Part of this has stemmed from forecasts that the US Economy is alive and well, and under the mantra ‘more growth, less easing’, the Fed might not continue to oblige the markets as before. Earnings continue to be solid so far, and Tesla and Netflix definitely did have good reports, but still not enough to increase averages for 3Q24, even though these are likely to occur further down the line. After a week that was light on economic data, the next 7 days will be very busy, with European and US GDPs on Wednesday, together with the ADP report, which usually anticipates the key labour report on Friday. And in the middle, there is the Core PCE Price Index, which is the US Central Bank’s favourite measure of inflation. Meanwhile, let’s have a look about the latest updates on the US election front:

Source: Polymarket.com

Source: Polymarket.com

The current situation points to a Trump victory, given his 30%+ advantage over Harris according to Polymarket. The state-by-state count is favourable to him too. In the last two weeks, I spoke of how Trump’s economic plans would add 4% to the S&P 500’s EPS, while Harris would subtract 5% – this beautiful chart from Bank of America highlights the sectors that would benefit the most.

Source: BofA US Equity & Quant Strategy

That said, the S&P 500’s current multiple is a staggering 21.7x, and while now I’m not too sure it won’t jump to 24x as it did in 1999, it is a figure that bears attention, and caution. Granted, there are much better economics at present, and much less living on hope. 22x is the multiple used by leading strategists to make their forecasts for S&P 500 targets, which have never been used before apart from the fateful dot.com boom (and bust). Let’s hope that earnings growth will be as good as expected, or possibly better because such a high multiple is far from healthy. Even though the official data call for a 3Q24 earnings growth of 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. 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. 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. 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. It is noteworthy to comment on the snap elections in Japan, for which the outgoing government (led by the LDP and its ally New Komeito) no longer has a majority, likely entering complex discussions to form a broader coalition government. Confirming equities as buy, on the back of David Kostin’s raised target for the S&P 500 to 6,000 by the end of 2024, upgrading bonds to buy, on the back of Tom’s recent piece which sees yields on the 10-year Treasuries having climbed too much, and remaining positive on the CHF, which seems to be the only currency to go up no matter what. Fasten your seat belts, and remember that volatility goes up and down (often very quickly). Israel did respond to Iran’s attack, but it looks like there’s no wish on either side for a further escalation (which would be very dangerous), so I’d call the news neutral. 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’s markets were a little tired, and challenged by the relentless rise in yields, with growth being crowned as winner on the back of Tesla’s wonderful earnings report. The Nasdaq was the only major market up; everything else was down. The JPY was further down last week, losing 2.2% compared to the USD, and there was a decrease of  7.4% in the last month. Once again, keep an eye on the currency to see when could be a good moment to step into Japanese equities, even though the formation of the new government might be complicated and it might have different goals than the BOJ. For 3Q24, the forecast for earnings growth is that they will increase by 3.6% – finally an upward revision – below the September 30th estimate (4.3%). 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 21.7x 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, although I now deem it possible. That said, some notable strategists (David Kostin and Ed Yardeni) have been using a multiple north of 20+ 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) or Cisco trading at 100x forward EPS are no longer seen, but still … Be careful when the S&P’s multiple begins with a 2. For now, there’s no other alternative to go with the flow(s).

*  After some fear last month about a possible recession in the US, a string of solid reports have managed to push it away. We’ll know more next week, although now the scenario seems to have changed. Before these would have an impact in predicting if and when the US Economy might get into a recession; now that these fears have eased (judging from the 10-year yields (!)), their impact is primarily felt by fixed income and may drive the extent of Fed’s easing policy going forward. The Atlanta Fed’s GDPNow prediction is for a 3Q24 growth of 3.3%, with the average of the blue chips well above 2% now, while the New York Fed’s Nowcast is a touch lower at 2.91%. 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 97.7% of a 25bp cut, which I think is what the Fed will do, with a 2.3% 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 71.7% 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 3.50-3.75%, which implies another 75bp 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. 

* Yields on US 10-year Treasuries have reached 4.23% and were significantly up last week, tracked closely by European government bond yields. The EUR lost further against the USD, now trading below 1.08. 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 or climb 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 3.6%, vs 4.3% on September 30th. The current forward P/E ratio for the S&P 500 is 21.7x – and while it is higher than the 5-year (19.6x) average and the 10-year average (18.1x), 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-year. 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 239.36, 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 275.08, 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 3.3%, down from a previous forecast of 3.4%, with the Blue Chips consensus now above 2% and rising. The latter’s Nowcast, which produces a less volatile forecast, was stable and showed growth in 3Q24 at 2.91%, compared with 3.00% 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 3.6%, compared with a forecast of 4.3% as of September 30th. Revenue growth is doing better, at 4.9% in 3Q24, vs 4.7% as of September 30th. For 2024, earnings growth is forecasted at 9.3%, 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 is well underway and next week will be key.  The highlights are Alphabet and AMD (Tuesday, After Close), Microsoft and Meta (Wednesday, After Close), and Amazon and Apple (Thursday, After Close). Only Nvidia remains to report after next Friday in the Magnificent 7.

Source: Earnings Whispers

It is worth bearing in mind this chart from Goldman Sachs regarding the reporting season: this week will be very very important. 

Source: Goldman Sachs, ISABELNET.com

Market Considerations

Source: Compustat, Goldman Sachs Global Investment Research, ISABELNET.com

Source: Goldman Sachs Global Investment Research, Goldman Sachs Group Inc, Refinitiv Eikon, 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 9.3% (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 15.2% (15.1% 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 65.1% chance to be reelected, vs 34.6% for Vice President Kamala Harris.

Two highlights this week. The first is a chart from Goldman Sachs which compares current valuations and those in the infamous dot.com era at its peak, finding that indeed the top 10 stocks have a much more manageable valuation at present rather than back then. The elevated level of the rest of the S&P 500’s multiple induces caution, as the 5-year average of 19.6x. Even the 10-year average of 18x looks expensive by historical standards. The second chart, also from Goldman Sachs, highlights a much more recent phenomenon: watch out for earnings reports. Back in 1999, especially for fast-growing companies, the top line was all the rage: miss it, and risk seeing your market cap reduced by 50% on the spot. Even in the Magnificent 7 we have companies growing quickly (like Nvidia), and others which grow more slowly, like Apple. Still, it comes as no surprise to me that there is heightened volatility at the time of the earnings report: it means there’s no room for error. If you’d like to reduce the volatility of the portfolio, avoid those trading days if you can, if necessary by selling the position before and buying it back after earnings.

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 long position on US bonds. For EU Bonds I advise going long and I suggest putting together a portfolio that includes the yield of Italian Bonds and the safety of German Bunds, without neglecting Corporate 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 (protocol 2425). 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 should be based in Italy to avail yourself of this service. If you are based outside Italy and are interested, please send me an email stating so, and then I’ll be happy to talk to you (reverse inquiry approach).

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.