US equities salute the election of Donald Trump as the US’s 47th President with new all-time records for all three indices; Japan was strong, while Europe slumped. BOE and Fed cut by 25bp as forecasted, but hurdles abound for both in their easing process. Pay attention to US CPI on Tuesday – now more important than ever as Trump’s presidency is deemed inflationary, and to EU and JP GDP, and US PPI, on Thursday. 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 valuations (very high multiples).

Major market events 11th November – 15th November 2024 

Economic data highlights of the week

Mon: 

Tue: UK Unemployment Rate (9/24), DE CPI (10/24), IN CPI (10/24), JP PPI (10/24)

Wed: US CPI (10/24) 

Thu: EU GDP (3Q24), US PPI (10/24), US Jobless Claims, UK BOE Gov Bailey Speaks, EU ECB President Lagarde Speaks, US Fed Chair Powell Speaks, JP GDP (3Q24)

Fri: BR, IN – Markets Closed, CN Industrial Production, CN Unemployment Rate, UK GDP (3Q24), UK Manufacturing Production (9/24), FR CPI (10/24), US Retail Sales (10/24), US Atlanta Fed GDPNow (4Q24) 

Performance Review

Index	1/11/2024	8/11/2024	WTD	YTD
Dow Jones	42,052.19	43,998.99	4.63%	16.66%
S&P 500	5,728.80	5,995.54	4.66%	26.41%
Nasdaq 100	20,033.14	21,117.38	5.41%	27.65%
Euro Stoxx 50	4,877.75	4,802.76	-1.54%	6.43%
Nikkei 225	38,053.67	39,500.37	3.80%	18.66%

Source: Google

InflectionPoint reports:

* As the night falls over Washington, we reflect on last week’s important events. 1) Donald Trump was elected the 47th President of the United States, winning by a landslide. 2) The BOE and the Fed cut by 25bp as expected, but challenges arose for both on the road to further easing. 3) While the world’s stock markets cheered the newly elected President, Europe marked a severe setback, perhaps worrying about tariffs that may hinder trade. 4) Chairman Powell’s not going until his term expires in May 2026, setting up a possible conflict with President Trump, who almost certainly will replace him when his term ends. 5) China is still weak, as the barely in line CPI (0.3% YoY) and negative PPI testify.

Amid all that, the S&P 500 and the Nasdaq 100 rose to new all-time records. Kudos to Polymarket.com for correctly predicting the outcome of the election, and boos to most of the other forecasters who actually didn’t. This reminds me of David Cameron’s second election as Prime Minister in 2015 – again by a landslide. It wasn’t politically correct then (as possibly it wasn’t in 2024 America) to say that you voted for the Conservatives or Trump, so people stayed silent. But boy, did they vote. Trump won all 7 swing states this time, states that in 2020 all voted for Joe Biden, leaving Kamala Harris with breadcrumbs, just the votes from the traditionally liberal-leaning states. So here’s the map.

Source: 270towin.com

At this point, most market pundits would acknowledge that Trump’s Presidency would be inflationary, putting further pressure on the Fed (see later for an update from CME’s FedWatch Tool). Tom has long speculated that Inflation could resurface as soon as January – meanwhile, yields on 10-year treasuries are soaring. Given an S&P 500 multiple that has hit the 22x mark, I really see echoes of the fated 1999-2000 (my heydays) here. While Trump’s fiscal plans would add 4% to the S&P 500’s EPS, we might have a glimpse of this in early January 2025 when the new EPS forecasts for the year are being refined. And for the second year running, a recession is nowhere in sight (possibly apart from Europe).

Source: BofA US Equity & Quant Strategy

That said, the S&P 500’s current multiple is a staggering 22.2x, 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. 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 a further escalation in the geopolitical scenario. 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 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). 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. Bear in mind that while David Kostin raised three times in 2024 his S&P 500 target this is unlikely to happen in 2025 when we might have once again positive results, but certainly not in the calibre of 2024. That said, in the era of ‘America First’, it is certainly worth to put an overweight on US Investments, particularly when the USD is forecasted to do so well.

Source: FactSet

* Last week was a winner for equities, with the notable exception of Europe. The US was the main star, with all three indices performing very very well. Japan managed to follow in that stride while the JPY lost just a little vs the USD. Europe was a disaster, but while there can be a bounce next week, I’m not particularly confident. Its performance has been ridiculed by that of its siblings across the pond. For 3Q24, the forecast for earnings growth is that they will increase by 5.3% – 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 22.2x 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 2.5%, up from 2.3% last week, with the average of the blue chips below 2%, while the New York Fed’s Nowcast is a touch lower at 2.06%, up from 2.01% forecasted earlier. The Federal Reserve did oblige with another 25bp cut in November, but the road ahead gets murky, particularly for 2025. Let’s start with December: there is a likelihood of 64.6% of a 25bp cut, which I think is what the Fed will do, with a 35.4% possibility of no cut. Going forward, there has been an adjustment for next year as well, as in December 2025 the consensus is to have rates at 3.75-4.00%, which implies another 50bp 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 4.30% and were mostly stable last week, tracked closely by European government bond yields. The EUR was crushed by the USD, now trading slightly above 1.07. 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 5.3%, vs 4.3% on September 30th. The current forward P/E ratio for the S&P 500 is 22.2x – 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 239.69, 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 274.59, 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 2.5%, 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 2.06%, compared with 2.01% 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 5.3%, compared with a forecast of 4.3% as of September 30th. Revenue growth is faster, at 5.5% in 3Q24, vs 4.7% as of September 30th. For 2024, earnings growth is forecasted at 9.4%, vs 9.6% as of September 30th, with revenues coming in at 5.1%, 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 that 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 91% 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, on November 20. Highlights next week include Cisco Systems (Wednesday, After Close) and Disney (Thursday, Before Open).

Source: Earnings Whispers

Market Considerations

Source: the Conference Board, Goldman Sachs Global Investment Research, ISABELNET.com

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

Revenue growth estimates for 2024 are forecasted to grow by 5.1% (5.0% on September 30th) and earnings growth estimates for 2024 are predicted to grow by 9.4% (9.6% on September 30th), so the future looks bright. Introducing forecasts for 2025, which sound again very positive, with revenue to grow by 5.7% (5.9% on September 30th) and earnings to grow by 14.9% (15.1% on September 30th). As mentioned, the Fed cut its rates by 50bp in September, and 25bp in November 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. 

Two highlights this week. First, we much thank Ryan Detrick and Carson Investment Research for the beautiful chart that highlighted that the (US) market is strong in November during an election year – what a start! As we look forward to 2025, the first chart this week is from Goldman Sachs, and shows a chart of US CEO’s confidence that is cautious but slowly growing, which could bode well for the economy (and for earnings) next year. Next, Goldman Sachs again, reminding us of the sector’s sensitivity to cuts in the corporate tax rate, which President Trump wants to bring down from 21% to 15%. Please note how close the S&P 500 and the Nasdaq 100 are in terms of impact on earnings; while the Nasdaq 100 does include some highfliers like Nvidia, as an index I prefer the S&P 500 due to its lower volatility and better risk return. 

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) valuations, which are nearing levels only seen once before (at least during my lifetime!).  

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!

Last week I sold a position in Barrick Gold to start a position in Meta; for Nvidia, I will await their report on Nov 20. At the same time, on Italian Equities, I doubled the position on Sanlorenzo. We have decided to leave out Nvidia, 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

Tom’s Multi-Asset Portfolio is up 22% in little more than a year, with a notable Sharpe Ratio of 2.7

 

https://www.wikifolio.com/en/int/w/wf000ipggi

Our Global Income and Growth Portfolio is up 24.5% in a year, with a Sharpe Ratio of 1.8

 

https://www.wikifolio.com/en/int/w/wf00ipiteq

My Italian Equities Portfolio is up 5.6% since late February and has outperformed the FTSE MIB Index by 180bp in this timeframe

 

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

Consulting accounts usually start from EUR 100,000. Please kindly note that you should be based in Italy to avail yourself of this service. If you are interested please drop me an email. Happy to send you my presentation and track record upon request.

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.