Retracement in equities after setting the record for the S&P 500 over 6,000 points; bonds continue to be weak. Very strong USD versus EUR, now trading below 1.06. More easing will likely be needed in Europe, while the US will continue to enjoy a strong economy. Nvidia’s earnings on 3Q24 can further boost the S&P 500’s earnings, as it is its largest contributor. 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). It is worth paying attention to the upcoming German elections on February 23, 2025.

Major market events 18th November – 22nd November 2024 

Economic data highlights of the week

Mon: EU Trade Balance, EU ECB President Lagarde Speaks

Tue: UK BOE Governor Bailey Speaks, EU CPI (10/24), CA CPI (10/24), US Atlanta Fed GDPNow (4Q24)

Wed: JP Trade Balance, UK CPI (10/24), DE PPI (10/24)

Thu: US Philadelphia Fed Manufacturing Index (11/24), US Fed Balance Sheet

Fri: JP CPI (10/24), UK Retail Sales (10/24), DE GDP (3Q24), UK Services PMI (11/24), US Manufacturing PMI (11/24), US Services PMI (11/24)

Performance Review

Index	8/11/2024	15/11/2024	WTD	YTD
Dow Jones	43,998.99	43,446.96	-1.25%	15.20%
S&P 500	5,995.54	5,870.62	-2.08%	23.78%
Nasdaq 100	21,117.38	20,393.33	-3.43%	23.27%
Euro Stoxx 50	4,802.76	4,794.85	-0.16%	6.25%
Nikkei 225	39,500.37	38,815.24	-1.73%	16.60%

Source: Google

InflectionPoint reports:

* After the initial euphoria, a pause. That had to be expected, given the unrelenting bond yields, and the high multiples at which equities are currently trading (22.ox). While it was refreshing to see that European equities managed not to lose further terrain last week, it remains to be seen what kind of an upside they can offer next year, particularly in the mid-small caps. With the European economy not enjoying the kind of strength that we can gauge overseas, it is likely that the ECB has much, much further to ease, particularly compared to its American counterpart. The unexpected elections in Germany are one more complication to an already difficult scenario: there are protests there because the government has vowed not to issue more debt while the economy is in a recession. It is also likely that the more dynamic UK Economy, buoyed by the latest budget, can easily overpower Europe’s (which would also be a benefit for the GBP), however, the Brits have to face increasing gilt yields courtesy of the bond vigilantes. Coming to Washington, while President-elect Trump considers who to pick for the ever-so-important role of Treasury Secretary, the Fed will likely ease less and less, so much that a cut in December has come into question. Meanwhile, the reporting season is almost over (again topping estimates as I had predicted, but in a week in which there is few economic data of particular relevance, we should all pay attention to the elephant in the room: Nvidia (what else?), reporting on Wednesday after the market’s close. 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 can see echoes of the fated 1999-2000 (my heydays) here. Goldman Sachs is out with important research which highlights that (equity) returns over the next 10 years will only be 3% per annum (baseline case); David Kostin also states that earnings will be the main driver of future upside. That said, the S&P 500’s current multiple is a staggering 22.0x, 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 putting an overweight on US Investments, particularly when the USD is forecasted to do so well. An expert colleague of mine pointed out that the first stage of USD/EUR repricing is currently over; it remains to be seen whether there will be a second stage, bringing the exchange to parity. It could well happen.

Source: FactSet

* Last week was a difficult one for equities, with the notable exception of Europe. Some of the gains of the previous week were eroded by the indexes’ own performance; at least the European markets lost little ground on top of the heavy losses that they suffered just the earlier week. Of course, the USD rose. For 3Q24, the forecast for earnings growth is that they will increase by 5.4% – again an upward revision, but let’s wait for Nvidia (they usually perform well and the stock falls anyway, in which case I would buy some for the Global Income and Growth portfolio) – and presently above the September 30th estimate (4.2%). 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 22.0x 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%, stable from 2.5% 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%, stable from 2.06% 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, where the call is increasingly looking 50/50: there is a likelihood of 62.6% of a 25bp cut, which I think is what the Fed will do, with a 37.4% 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 (or 75bp if there is no cut in December), 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 4.41% and were mostly up last week, tracked closely by European government bond yields. The EUR was once again crushed by the USD, now trading slightly below 1.06. 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 5.4%, vs 4.2% on September 30th. The current forward P/E ratio for the S&P 500 is 22.0x – 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 239.84, 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 274.92, 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 2.06% last week. It is interesting to note that the estimates from the two Federal Reserve Banks are not too far away, even though I do consider that of the New York Fed to be the more accurate one. Earnings growth for 3Q24 is 5.4%, compared with a forecast of 4.2% 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 9.3%, vs 9.6% 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 that happened in the last two weeks (the next update will be on November 27th). 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 93% of the S&P 500 having already reported so far. Next week will be another busy one, with a chance to increase the estimates for 3Q24 even further. Highlights next week include Walmart (Tuesday, Before Open), and Nvidia (Wednesday, After Close).

Source: Earnings Whispers

Market Considerations

Source: Bloomberg Finance LP, Deutsche Bank Asset Allocation, ISABELNET.com

Source: Goldman Sachs Global Investment Research, Department of Commerce, 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% (9.6% 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 15.0% (15.1% on September 30th). As mentioned, the Fed cut its rates by 75bp so far 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, again on the returns of the S&P 500 in an election year, this chart from Deutsche Bank shows us that we are pretty much in the middle of the upward trajectory to achieve the 4% forecasted increase, despite the setback from last week. The second chart from Goldman Sachs shows that core inflation, apart from the housing component, has pretty much returned to the Fed’s preferred measure of 2%, which should help the FOMC Committee to ease further. I understand and acknowledge that they will be uneasy by such a strong equities performance, and such high yields for treasuries as well. Please note how close the S&P 500 and the Nasdaq 100 are in terms of overall performance; while the Nasdaq 100 does include some highfliers like Nvidia with a much heavier weight than its competitor, 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. Pay attention to UK and US Bonds, as they offer attractive returns, and they are buoyed by their respective currencies which currently enjoy a positive momentum. 

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!). The German Elections are worth worrying about, as they can signal a gameplan change when it comes to allowable indebtedness and the overall strength of the European Union.

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!

Tom updated the Multi-Asset Portfolio with several trades last week. No trades for the other two portfolios. 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 21% in little more than a year, with a notable Sharpe Ratio of 2.6

 

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

Our Global Income and Growth Portfolio is up 24.6% in little more than a year, with a Sharpe Ratio of 1.7

 

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

My Italian Equities Portfolio is up 5.7% since late February and has outperformed the FTSE MIB Index by 70bp 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.