US Equities to new records; outrageous (!) forecast of 7,007 for the S&P 500 by the end of 2025. Bonds turn higher, thanks to lower yields, both in the US and in most of Europe. This Wednesday’s CPI will confirm a possible 25bp cut by the Fed in December, which seems likely once again. The ECB will cut again by 25bp on Thursday; the outlook will be important, but easing should continue in 2025. Should the conflict in Ukraine or 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 political appetite there is to support Europe’s frail growth.

Major market events 9th – 13th December 2024

Economic data highlights of the week

Sun: JP GDP (3Q24), JP GDP Price Index (3Q24)

Mon: CN CPI (11/24), CN PPI (11/24)

Tue: CN Imports (11/24), CN Exports (11/24), AU RBA Interest Rate Decision (12/24), DE CPI (11/24), US Nonfarm Productivity (3Q24), US Unit Labour Costs (3Q24), JP PPI (11/24)

Wed: US CPI (11/24), CA BOC Interest Rate Decision (12/24)

Thu: CH SNB Interest Rate Decision (12/24), EU ECB Interest Rate Decision (12/24), US PPI (11/24), US Initial Jobless Claims, US Fed’s Balance Sheet

Fri: UK GDP (10/24), UK Manufacturing Production (10/24), FR CPI (11/24), SP CPI (11/24). EU Industrial Production (10/24)

Performance Review

Source: Google

InflectionPoint reports:

* It looks like (US) Equities are the only game in town now, and last week was no exception. Again powered by a decline in bond yields (still above 4%, though) Wall Street is increasingly leaving its mark, with new all-time records by the S&P 500 and the Nasdaq 100, for starters. But it was a positive week for Europe, too, and Japan added to its strong performance this year without a further weakening of its currency. The main show was Friday’s employment report, and it did not disappoint: strong enough to quash any doubts about the resilience of the US Economy, but not too strong to prevent further easing by the Fed, which led technology, in particular, higher. This week we are having some very important data as well as three meetings of important central banks: a clue to see if the easing pattern can indeed continue. The key is Wednesday’s US CPI, which might well determine if there is going a rate cut in December (the November employment report gave the Fed the green light). EU’s GDP came in line with consensus, and next week there will be Germany’s CPI, which almost certainly will lead to another cut by the ECB. Curious to see whether the SNB will follow suit, but I wouldn’t be surprised if the CHF didn’t lose much. Chairman Powell said, once again, that the FOMC is not in a hurry to lower interest rates; this is a luxury that President Lagarde unfortunately does not have. 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. With the European economy not enjoying this type of strength that we can gauge overseas, the ECB has 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 possible that the more dynamic UK Economy, buoyed by the latest budget, could overpower Europe’s (which would also benefit the GBP), however, the Brits have to face increasing gilt yields courtesy of the bond vigilantes. With earnings for 3Q24 almost over, we look to 4Q24 with confidence and stronger growth, although it will be more difficult this time to beat estimates again. Given an S&P 500 multiple that has hit the 22x mark, I can see echoes of the fated 1999-2000 (my heydays) here. 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. The JPY is having its moment, too, on the back of the narrowing interest differential with the major Western economies – but if it is a cross under particular pressure, unfortunately, it is EUR/JPY. Confirming equities as buy, confirming bonds to buy, 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). 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. The presence of US Equities is very significant in the MSCI World Index, with over 70% presently. 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, together with US and EU Periphery bonds, while the USD lost some gains versus the EUR. For 4Q24, the forecast for earnings growth is that they will increase by 11.9%, while the September 30th estimate stands at 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 22.3x 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. At the time being, there’s no alternative to go with the flow(s) and remember Tina (There Is No Alternative).

*  According to last week’s report about the US 3Q24 GDP, growth came in at 2.8%, in line with the estimate. The Atlanta Fed’s GDPNow prediction is for a 4Q24 growth of 3.3%, up from 2.7% last week, with the average of the blue chips now above 2%, while the diverging forecast New York Fed’s Nowcast is much lower at 1.89%, up from 1.81% 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 85.1% of a 25bp cut, which I think is what the Fed will do, with a 14.9% possibility of no cut. Obviously, the CPI report this week will be important, although, barring a disaster, the cut should stand. 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 (or 100bp 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 strong demand for the new chips Hopper and Blackwell.

* Yields on US 10-year Treasuries have reached 4.15% and were mostly down last week, and European government bond yields, apart from Bonds, were mostly declining. The USD lost some ground relative to the EUR, and that went pari-passu with the new, lower rates forecasts for 2025. 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 4Q24 are currently estimated at 11.9%, vs 14.5% on September 30th. The current forward P/E ratio for the S&P 500 is 22.3x – and while it is higher than the 5-year (19.7x) 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 239.97, 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 275.24, 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 for decent forecasts for 4Q24, according to Atlanta and New York Federal Reserve Banks, The former’s GDPNow model is forecasting growth of 3.3%, with the Blue Chips consensus now above 2%. The latter’s Nowcast, which produces a less volatile forecast, was up slightly and showed growth in 4Q24 at 1.89%, compared with 1.81% last week. It is interesting to note that the estimates from the two Federal Reserve Banks are now diverging, but I consider that of the New York Fed to be more accurate. Earnings growth for 4Q24 is 11.9%, compared with a forecast of 14.5% as of September 30th. Revenue growth is slower, at 4.8% in 4Q24, vs 5.2% as of September 30th. For 2024, earnings growth is forecasted at 9.6%, vs 9.7% 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 (November 2025) 32.89%. The peak was 68.76% in April 2024, and it was the only time since 1960 in which a recession did not materialise given such a forecast. The current level is not too far from what economists are currently predicting, 35% chances of a recession in 2025.

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 now finished. Here’s a list of companies reporting this week. Highlights include Oracle (Monday, After Close), Adobe (Wednesday, After Close), and Broadcom (Thursday, After Close).

Source: Earnings Whispers

Market Considerations

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

Source: Bloomberg, 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 9.6% (9.7% 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, we have a chart from the excellent Ryan Detrick, who has been spot-on with his bullish forecasts. This chart shows that once a bull market gets to 2 years in length, it can go on for much longer. The second chart from Bloomberg shows that Wells Fargo has the highest target on the street, and sees the Standard & Poor’s 500 reach 7,000 by the end of 2025. Granted, that implies a lot of optimism, although if there is no recession in the US, rate cuts usually add fuel to the fire. One has to wonder if returning inflation won’t derail this plan – this is something that has to be monitored very closely, as well as earnings/reports, which now are everything and then some. I do believe that if AI is the driver of the economy and of the market, US overperformance will indeed continue.

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 in Ukraine and the Middle East, although is it quieter now on both fronts. 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 on February 23 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. Next year looks less exciting for the Nikkei 225 and the Topix if the JPY is to have a revival due to rates being firm there and declining elsewhere. 

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 24.6% in little more than a year, with a notable Sharpe Ratio of 2.9

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

Our Global Income and Growth Portfolio is up 29.3% in little more than a year, with a Sharpe Ratio of 2.0

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

My Italian Equities Portfolio is up 8.4% since late February and has outperformed the FTSE MIB Index by 175bp 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 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.