Shocking start of the year has European Equities up, US and Japanese Equities down. The performance of the US Treasuries while the Fed is easing has been easing is the second worst on record, beaten only by the Volker days of 1981. 4Q24 earnings start this week with the big banks on Wednesday; economic forecasts are solid. Watch out for US PPI on Tuesday, US CPI on Wednesday, and EU CPI on Friday. 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 13th – 17th January 2025

Economic data highlights of the week

Mon: JP – Markets Closed,  CN Exports (12/24), CN Imports (12/24), IN CPI (12/24)

Tue: CH PPI (12/24), US PPI (12/24)

Wed: UK CPI (12/24), FR CPI (12/24), SP CPI (12/24), US CPI (12/24), US Fed Beige Book

Thu: CN PBoC Loan Prime Rate (1/25), UK GDP (11/24), DE CPI (12/24), US Philly Fed Manufacturing Index (1/25), US Retail Sales (12/24), US Initial Jobless Claims, US Atlanta Fed GDPNow (4Q24), US Fed Balance Sheet

Fri: CN GDP (4Q24), CN Industrial Production (12/24), UK Retail Sales (12/24), EU CPI (12/24)

Performance Review

Source: Google

InflectionPoint reports:

* Well, the year didn’t quite start as expected. Were bond yields rising, a resurging inflation threat, or extended multiples? Certainly, last Friday’s strong Nonfarm Payrolls didn’t help. Markets long, once again, for rate cuts, and positive data from the labour market, albeit non-inflationary, doesn’t quite help the cause. We’ll soon have an update from 4Q24 earnings, and we’ll be able to gauge whether they have lived to hyped-up expectations. Meanwhile, bond yields are the highest I have seen in a while, not helping equities deal with such high valuations. Yes, rates were cut in 2024, but that gave way to a steepening of the curve probably never seen before – at least nobody is talking about a recession right now. We’ll have our usual checks with the CME FedWatch tool and the probability of recession as derived from the yield curve. Meanwhile, bond vigilantes are at work in the UK, where higher yields are unraveling the Chancellor’s plan for growth through higher costs to service the debt. Europe is the area that has the best chance of continued rate reductions, as the ECB has no choice but to administer copious doses of medicine to try to revive the sick patient. I suspect nothing much will happen before February 23 when the German Elections will take place. Personally, I have been very surprised by seeing outgoing Prime Minister Olaf Scholz as a candidate for his party; I believe that will mean that CDU’s candidate Christian Merz will almost certainly win the elections, although he too will have to fend off the far right, represented by the Afd. Meanwhile. the AI revolution is continuing, with companies positioning how to best profit from it – and Capex will inevitably rise for most. We look to 4Q24 with confidence and stronger growth, although it will be more difficult this time to beat estimates again; however, 11.7% is the highest earnings growth in a year. Given an S&P 500 multiple that is nearing 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. The biggest worries for (US) markets are recession, earnings, valuations, and a further escalation in the geopolitical scenario. Confirming equities as buy (with the weekly 3% stop), confirming bonds to buy (notwithstanding the pain), 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. Parity with the EUR is a scenario that could happen in 2025. 

* I could say that last week represented the victory of value over growth, but it was very strange, and possibly driven by valuations. Europe was the only market that shone, quite unexpectedly, and both the US and Japan started the year in the red. The Nasdaq reminded everyone last week why America is the land of opportunities and technological supremacy, with a strong performance together with Japan. It was a classic case of growth prevailing versus value; the Dow Jones, which had its moment in November and early December, is currently on a losing streak. With yields rising across the board, the USD pushed higher versus the EUR (parity in 2025 is something that could well happen). For 4Q24, the forecast for earnings growth is that they will increase by 11.7%, while the December 31st estimate stands at 11.9%. 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 21.5x 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 other choice but to go with the flow(s) and with US Equities – remember Tina (There Is No Alternative). Tara (There Are Real Alternatives) is looming just around the corner, so this is why a portfolio must be well diversified. I’m getting worried as we are approaching the end of January, and we won’t see another Nonfarm Payroll before the end of the month – recall ‘As goes January, so goes the year’. Shocked and bruised by such a false start, I’m going to watch the next events very carefully. CPI numbers across the board this week might be able to shed light on how much central banks can – eventually – lower rates. 

*  In the latest revision, US 3Q24 GDP clocked at 3.1%, better than expectations. The Atlanta Fed’s GDPNow prediction is for a 4Q24 growth of 2.7%, up from last week, with the average of the blue chips now above 2%. It will be updated on Thursday. The not-so-diverging forecast of New York Fed’s Nowcast is lower at 2.36%, with a significant bounce of 46bp from the previous forecast. They have upgraded their forecast of 1Q25 to 2.74%, with a jump of 53bp last week.  forecast. The Federal Reserve did oblige with another 25bp cut in December, but now is operating with a much greater degree of care. It is almost certain (93.6%) that they will be on hold in January, with the first cut forecasted in May (Goldman Sachs predicted March), and with 2 cuts currently seen in December 2025, with rates at 3.75-4.00% by then, against a Goldman Sachs prediction of 3 cuts in 2025. 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 4.76% and were mostly up last week, as well as European government bond yields. 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 11.7%, vs 11.9% on December 31st. The current forward P/E ratio for the S&P 500 is 21.5x – and while it is higher than the 5-year (19.7x) average and the 10-year average (18.2x), 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. The 2025 S&P 500 bottom-up earnings estimate is 274.19, signalling optimism for future earnings, in line with consensus at 277.

Source: FactSet

* After a stronger 3.1% reading of US GDP for 4Q24, 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 2.7%, with the Blue Chips consensus now above 2%. The latter’s Nowcast, which produces a less volatile forecast, was up significantly and showed growth in 4Q24 at 2.36%, compared with 1.90% last week. While the estimates from the two Federal Reserve Banks are now diverging, I consider that of the New York Fed to be more accurate. Earnings growth for 4Q24 is 11.7%, compared with a forecast of 11.9% as of December 31st. Revenue growth is slower, at 4.7% in 4Q24, vs 4.6% as of December 31st. For 2024, earnings growth is forecasted at 9.4%, vs 9.5% as of December 31st, with revenues coming in at 5.0%, vs 5.0% as of December 31st. 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 (December 2025) 30.80%. 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, a 35% chance 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 4Q24 will now start in earnest with the big banks, albeit on a Wednesday in place of the usual Friday. Here’s a list of companies reporting this week. Highlights include JP Morgan Chase, Citi, Goldman Sachs (Wednesday, Before Open), TSMC, and Bank of America (Thursday, Before Open). 

Source: Earnings Whispers

Market Considerations

Source: dbDIG Survey, Deutsche Bank, ISABELNET.com

Source: Compustat, Morgan Stanley Research, ISABELNET.com

Source: Haver Analytics, Datastream, Goldman Sachs Global Investment Research, ISABELNET.com

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

Revenue growth estimates for 2024 are forecasted to grow by 5.0% (5.0% on December 31st) and earnings growth estimates for 2024 are predicted to grow by 9.4% (9.5% on December 31st), so the future looks bright. Introducing forecasts for 2025, which sound again very positive, with revenue to grow by 5.8% (5.8% on December 31st) and earnings to grow by 14.8% (14.8% on December 31st). As mentioned, the Fed has cut its rates by 100bp in 2024 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. 

Four highlights this week. First, we have a survey from Deutsche Bank in which the majority of respondents (35%) think that the S&P 500 will be up between 5 – 10% this year. 24% expect a negative return for the index, and 23% are more constructive. There is no question that, despite the Fear and Greed index flashing Fear at the moment, the consensus is still positive. The second chart from Morgan Stanley highlights quality and large caps in a late-cycle like the one we find us in, so stick to good companies, quality earnings, and large caps. The next two charts are less positive and throw some caution. Goldman Sachs reminds us that drawdown risk has risen in 2025, which has to be expected – alarm bells are not yet ringing but it is better to tread warily (and sell when you don’t understand why something is happening). The fourth and last chart is the more puzzling and the more disturbing. The present move in Treasuries – when the Fed is easing – has been the second worst ever, only beaten by the 1981 cycle when the American Central Bank – then led by Paul Volcker – was tightening. It is then so difficult to explain such a move if we consider that yields on the short end have fallen in response to the cuts. They should come down, but a part in me fears that they will reach 5% before doing so.

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 revenue/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 20.6% in little more than a year, with a notable Sharpe Ratio of 2.2

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

Our Global Income and Growth Portfolio is up 26.9% 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 10.2% since late February and has outperformed the FTSE MIB Index by 160bp 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.