Nvidia’s good earnings lifts US Equities, with the Dow making an all-time record. David Kostin hikes his target for end 2025 to 6,500 for the S&P 500. Stable bonds in the US, while gaining some ground in Europe.  Powerful USD versus EUR, now trading below 1.05. More easing will likely be needed in Europe, while the US will continue to enjoy a strong economy. Pay attention to US GDP and to the Fed’s favourite measure of inflation (Core PCE Price Index) to get some clues about a possible cut in December; EU’s CPI on Friday is significant to understand how low can the ECB go. 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) or revenues/earnings not matching forecasts, followed by adverse geopolitical outcomes, and valuations (very high multiples). It is worth paying attention to the upcoming February 23, 2025 German Elections, to understand how much Europe’s frail growth can be supported by the EU and the ECB.

Major market events 25th November – 29th November 2024

Economic data highlights of the week

Mon: CH Employment Level, DE Ifo Business Climate Index

Tue: JP BOJ Core CPI, US CB Consumer Confidence, US FOMC Meeting Minutes

Wed: NZ Interest Rate Decision, US Initial Jobless Claims, US GDP (3Q24), US Core PCE Price Index (10/24), US Atlanta Fed GDPNow (4Q24), US FOMC Meeting Minutes

Thu: US – Markets Closed, SP CPI (11/24), DE CPI (11/24) 

Fri: US – Early Close at 1pm – JP CPI (11/24), DE Retail Sales (10/24), FR CPI (11/24), FR GDP (3Q24), CH GDP (3Q24), DE Unemployment Rate (11/24), EU CPI (11/24), CA GDP (3Q24), US Chicago PMI, US Fed’s Balance Sheet

Performance Review

Source: Google

InflectionPoint reports:

* And then there was Nvidia. The technology company 3Q25’s report and guidance for 4Q25 did little to propel the stock, but on the other hand brought back the US Indexes to their highs, with the Dow marking a new, all-time record. What is puzzling is Europe trading like a lame duck; granted, the latest numbers confirmed negative GDP growth for Germany, but it looks like the forecasts for the two largest economies, with America continuing with a strong economy and limited rate cuts, and the old continent being in the middle of a slump, and counting on several rate cuts to revive its fortunes. Last week yields were mostly stable in the US and were declining further in much of the EU. After the initial euphoria, a pause. While it was refreshing to see that European equities managed not to lose much 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 this type 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 benefit the GBP), however, the Brits have to face increasing gilt yields courtesy of the bond vigilantes. Coming to Washington, while President-elect Trump has put together his team, appointing Scott Bessent as Treasury Secretary (a nod to Wall Street), the Fed will likely ease less and less, so much that a cut in December has come into question. With earnings for 3Q24 almost over, we look to 4Q24 with confidence and stronger growth. 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 highlighting 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, as well as introducing a new, increased forecast of 6,500 for the S&P 500 by end 2025, which he gets by applying a 21.5x multiple to the expected earnings. 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, lower than David Kostin’s new 6,500 target. In the era of ‘America First’, it is 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

* Equities did well last week, particularly after Nvidia reported numbers last Wednesday after the market’s close. Of course, the USD rose. For 3Q24, the forecast for earnings growth is that they will increase by 5.8% – again an upward revision – and presently above the September 30th estimate (4.2%). It is worth mentioning that earnings for 4Q24 are expected to rise by 12%, albeit short of the Sep 30th forecasts of 14.5%. 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 estimated  3% growth, but a substantial number anyway. We will get another update on Wednesday. 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 slowdown 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 2.6%, up from 2.5% last week, with the average of the blue chips below 2%, while the New York Fed’s Nowcast is lower at 1.91%, down 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 52.7% of a 25bp cut, which I think is what the Fed will do, with a 47.3% 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. That said, Jensen Huang, CEO of Nvidia, mentioned very strong demand for the new chips Hopper and Blackwell.

* Yields on US 10-year Treasuries have reached 4.41% and were mostly stable last week, while European government bond yields were mostly declining. The USD once again crushed the EUR, now trading slightly below 1.05. 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 5.8%, 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; 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 240.09, 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 275.16, 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 2.6%, with the Blue Chips consensus below 2% for the time being. The latter’s Nowcast, which produces a less volatile forecast, was down and showed growth in 4Q24 at 1.91%, 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 more accurate. Earnings growth for 3Q24 is 5.8%, compared with a forecast of 4.2% as of September 30th. Revenue growth is faster, at 5.6% 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 5.0%, 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%. They mustn’t have 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 95% of the S&P 500 having already reported so far. Next week there will be a reduced schedule do to the Thanksgiving holidays. Highlights include Zoom (Monday, After Close), and Dell (Tuesday, After Close).

Source: Earnings Whispers

Market Considerations

Source: Goldman Sachs, ISABELNET.com

Source: Carson Investment Research, Ryan Detrick, 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 9.4% (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 15.0% (15.1% on September 30th). As mentioned, the Fed has 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, while we will have an update on the latest GDP numbers on Wednesday, followed by the Fed’s favourite measure of inflation, the Core PCE Price Index, later on the same day, we are reminded that Goldman Sachs’ own forecast are ahead of consensus for this year and next. The second chart from Carson Investment Research and Ryan Detrick, shows that on average bull markets have a longer life than bears credit it with. A couple more considerations: with President-elect Trump, Trade will take again centre stage; it will be seen how especially European companies can navigate an increasingly difficult environment. Furthermore, the last two years are the first this century in which the S&P 500 managed to have a back to back performance of 20%+; normally this bodes well for the future, while multiples remain elevated on any metric.

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 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 or revenues/earnings not matching forecasts; 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 regarding 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!

https://www.wikifolio.com/en/int/w/wf00inf8ig

Tom’s Multi-Asset Portfolio is up 23.9% in little more than a year, with a notable Sharpe Ratio of 2.8

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

Our Global Income and Growth Portfolio is up 27.5% in little more than a year, with a Sharpe Ratio of 1.9

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

My Italian Equities Portfolio is up 5.4% since late February and has outperformed the FTSE MIB Index by 260bp 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. I am 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.