Ok-ish earnings, a US GDP slightly below forecasts, and increased volatility because of the upcoming US Presidential election send equities down and bond yields up. Tuesday is the election day, with Harris closing some of the gap it had vs Trump. Thursday is the day of two central banks, the BOE and the Fed, and both are likely to cut rates by 25bp. In Presidential years, a strong November follows a weak October. Should the conflict in the Middle East escalate, shift to caution (flight to quality). 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 4th November – 8th November 2024 

Economic data highlights of the week

Mon: JP – Markets Closed, EU Manufacturing PMI, US Factory Orders

Tue: AU RBA Interest Rate Decision, UK Services PMI, US Presidential Election, US Services PMI, US ISM Non-Manufacturing PMI, US Atlanta Fed GDPNow (4Q24)

Wed: JP Services PMI, EU Services PMI, EU PPI

Thu: UK BOE Interest Rate Decision, US Jobless Claims, US Fed Interest Rate Decision, US Fed Balance Sheet

Sat: CN CPI, CN PPI 

Performance Review

Index	25/10/2024	1/11/2024	WTD	YTD
Dow Jones	42,114.40	42,052.19	-0.15%	11.50%
S&P 500	5,808.12	5,728.80	-1.37%	20.79%
Nasdaq 100	20,352.02	20,033.14	-1.57%	21.09%
Euro Stoxx 50	4,943.08	4,877.75	-1.32%	8.09%
Nikkei 225	37,913.72	38,053.67	0.37%	14.32%

Source: Google

InflectionPoint reports:

* The week that wasn’t. It should have been very important with meaningful economic and earnings releases, but somehow both disappointed, with a hint of an increase in volatility towards the end as we approach the crucial US Presidential election. The culprit was bond yields, which shot up to a level not seen with the current inflation, possibly as a result of tension because of the incoming US vote. The Core PCE Price Index came in at 2.7% yearly, in line with expectations – still the rise of 70bp in treasury yields since the Fed cut rates in September is staggering. Watch out for any return of inflation, which as Tom predicted, could make an appearance in January, when the new President will be inaugurated. The race to 270 votes seems to be close, so let’s see the last update before the big day:

 

Source: Polymarket.com

Source: Polymarket.com

The election is too-close-to-call for several forecasters, and even Polymarket has meaningfully narrowed the gap between Trump and Harris to just 10%. The ‘new’ map highlights the 7 swing states which the candidates must win in order to be elected (they don’t have to win all of them, just the majority). While it is too early to consider the winning candidate’s policies, just a reminder that  Trump’s fiscal 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 21.3x, 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, 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 earnings growth will be as good as expected, or possibly better because such a high multiple is far from healthy. 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 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

* There cannot be sunshine for equities while bonds are having a difficult time, and last week was no exception. Japan was the only market up, with the fall punishing growth and value alike. 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. Japan was the only major market up; everything else was down. The JPY was slightly up vs USD last week; 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 have different goals than the BOJ. For 3Q24, the forecast for earnings growth is that they will increase by 5.1% – again an upward revision – and presently above 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 21.3x 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).

*  The initial report about US 3Q24 GDP growth came in at 2.8%, below the estimate of a 3% growth, but a very solid number anyway. Bonds are telling us that their immediate fear is of a returning inflation, rather than an upcoming recession (which we can rule out for 2024 – the second year that wasn’t). After some fear last month about a possible recession in the US, a string of solid reports have managed to push it away. The Atlanta Fed’s GDPNow prediction is for a 4Q24 growth of 2.3%, with the average of the blue chips below 2%, while the New York Fed’s Nowcast is a touch lower at 2.01%, after a reduction of 46bp in just one 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 95.4% of a 25bp cut, which I think is what the Fed will do, with a 4.6% 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 85.5% 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 4.38% and were significantly up last week, tracked closely by European government bond yields. The EUR gained some ground against the USD, now trading above 1.08. I’m starting to think that most 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 5.1%, vs 4.3% on September 30th. The current forward P/E ratio for the S&P 500 is 21.3x – 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 more truthful picture of the multiples the S&P 500 should trade in a normal situation (if there is 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 239.88, now greater than before due to new, above-average estimates to 3Q24 numbers, 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 274.81, signalling optimism for future earnings, in line with consensus at 277.

Source: FactSet

* After a weaker 2.8% reading of US GDP for 3Q24, we are looking to decent forecasts for 4Q24, according to Atlanta and New York Federal Reserve Banks, The former’s GDPNow model is forecasting growth of 2.3%, with the Blue Chips consensus below 2% for the time being. The latter’s Nowcast, which produces a less volatile forecast, was stable and showed growth in 4Q24 at 2.01%, compared with 2.47% last week. It is interesting to note that the estimates from the two Federal Reserve Banks are converging for this quarter as well. Earnings growth for 3Q24 is 5.1%, compared with a forecast of 4.3% as of September 30th. Revenue growth is faster, at 5.2% in 3Q24, vs 4.7% as of September 30th. For 2024, earnings growth is forecasted at 9.3%, vs 9.7% 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 (September 2025) 43.20%. Definitely they must have not considered the very significant increase in yields which happened in the last two weeks. 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, with 75% of the S&P 500 having already reported so far. Next week will be another busy one, with a chance to increase further the estimates for 3Q24. Only Nvidia remains to report in the Magnificent 7, likely the following week.

Source: Earnings Whispers

It is worth bearing in mind this chart from Goldman Sachs regarding the reporting season: this week will be less important, but still with 8% of the S&P 500 to report. 

Source: Goldman Sachs, ISABELNET.com

Market Considerations

Source: Carson Investment Research, Factset, Ryan Detrick, ISABELNET.com

Source: 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 9.3% (9.9% on September 30th), so the future looks bright. Introducing forecasts for 2025, which sound again very positive, with revenue to grow by 5.7% (6.0% on September 30th) and earnings to grow by 15.1% (15.1% on September 30th). As 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 55.3% chance to be reelected, vs 44.8% for Vice President Kamala Harris.

Two highlights this week. The first is a chart from Carson Investment Research which tells us that it’s normal to have a weak October (which we have just witnessed), but that it is usually followed by a strong November in election years. Let’s wait and see if the volatility will subside after Tuesday once the winner is known. The second chart from Goldman Sachs tells us of a convergence in earnings growth between some of the Magnificent 7 and the rest of the S&P 500. This could possibly lead to more harmony and less concentration, which would be welcome for the markets.

For equities, be careful not to fall into ‘Buffett’s trap’ – he famously said that there were moments when 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 want 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, although it was noted that Warren Buffett sold some of his stake in Apple to raise cash. We might just do the same, possibly to fill part of the gap in Meta and Nvidia, for which we’ll probably await their earnings report (when the stock usually falls). 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 note that you should be based in Italy to avail yourself of this service. If you are based outside Italy and are interested, please email me stating so, and then I’ll be very 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.