Strong earnings and weaker-than-expected CPI drive the performance of Western equities, with the Dow Jones and the Euro Stoxx 50 shining. BoJ on Friday is supposed to hike again, bringing rates to 50bp – strong Yen and weak equities as a consequence. The earnings report continues in earnest this week with Netflix on Tuesday after the close.  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 20th – 24th January 2025

Economic data highlights of the week

Mon: US – Markets Closed,  CN PBoC Loan Prime Rate (1/25), DE PPI (12/24), CH PPI (12/24)

Tue: UK Unemployment Rate (11/24), DE ZEW Economic Sentiment (1/25), CA CPI (12/24), NZ CPI (4Q24) 

Wed: UK Public Sector Net Borrowing (12/24) 

Thu: US Initial Jobless Claims, US Fed Balance Sheet

Fri: JP BoJ Interest Rate Decision, DE Services PMI, UK Services PMI, US Services PMI, US Manufacturing PMI

Performance Review

Source: Google

InflectionPoint reports:

* It just took the US earnings reporting starting week to set the score right for the markets. All US Equities rebounded strongly, with the Dow Jones Industrials (!) leading, the Standard and Poor’s 500, and the Nasdaq 100 following in the leader’s footsteps.  Plus, there’s more: 4Q24 earnings are now set at 12.5% growth, outperforming the most recent expectations as of Dec 31st, and, notwithstanding the indexes’ strong performance, the S&P 500 multiple barely moved, raising only by a notch, at 21.6x. This is everything I have been saying for a while: we need very strong earnings to compensate for a very high multiple, and last week the markets did just that, with an icing on the cake, represented by the falling yields (finally!) on US Treasury bonds. So the US Economy is indeed firing on all cylinders, and producing earnings to match; next week, in the absence of notable corporate data, will be focused on earnings reports once again, and of course by Donald Trump’s inauguration as the 47th president of the United States. FactSet presents a very interesting chart showing the top 10 contributors to 4Q24’s earnings growth:

Source: FactSet

WJP Morgan Chase, Citigroup, Truist Financial, and Bank of America have already reported 4Q24 earnings, each of them contributing to increasing the expected returns of the S&P 500 as a whole. 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, and pressuring the GBP, although last week there was a respite for the gilts. 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. 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. Watch out next week, on Friday, for the BoJ interest rate decision, with the consensus forecasting an increase of 25bp to bring the rate to 50bp; this has the potential to make the JPY stronger and the Nikkei 225 weaker, already we are facing a significant gap in performance between the Asian market and its western counterparts. 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. That said, I feel that Europe should not be overlooked, even though Goldman Sachs says there is limited upside from the current levels. Given that Europe is no longer adequately represented in the MSCI World, I suggest adding a smaller position in MSCI Europe to benefit from further rises in these indexes – which offer some protection by the ECB put, whose next monetary policy meeting is scheduled on Thursday, January 30.

* Value clearly was the winner last week, with the Dow Jones and the Euro Stoxx 50 triumphing over other American indexes, although the latter nearly 3% rise in a week was far from poor. Reading my comments from the week before, I realise that the Dow made a spectacular comeback, after passing the baton to the ever-powerful Nasdaq for a while. I could say that last week represented the victory of value over growth, but it was very strange, and possibly driven by valuations. The USD was pretty much unchanged against the EUR and is trading around 1.03 (parity in 2025 is something that could well happen). For 4Q24, the forecast for earnings growth is that they will increase by 12.5%, 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 21.6x 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. The December CPI was somewhat more muted compared to expectations but is still closer to 3% rather than 2%, so we can take it as a given that the Fed will be on a break until March (Goldman Sachs) or June (CME FedWatch tool). Eventually, earnings came to the rescue and can look with confidence to the close of January, which will hopefully confirm that we can look to another positive year in front of us.

*  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 3.0%, up from 2.7% last week, with the average of the blue chips now well above 2%, a very positive sign. The not-so-diverging forecast of New York Fed’s Nowcast is lower at 2.56%, albeit with a significant bounce of 20bp from the previous forecast. They have upgraded their forecast of 1Q25 to 3.00%, with a jump of 26bp last week. 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 (97.9%) that they will be on hold in January, with the first cut forecasted in June (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 4.62% and were mostly down 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 12.5%, vs 11.9% on December 31st. The current forward P/E ratio for the S&P 500 is 21.6x – 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 274.01, 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 3.0%, with the Blue Chips consensus now well above 2%. The latter’s Nowcast, which produces a less volatile forecast, was up significantly and showed growth in 4Q24 at 2.56%, compared with 2.36% 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 12.5%, 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 4.9%, 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 (November 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 continue in earnest. Here’s a list of companies reporting this week. Highlights include Netflix (Tuesday, After Close), Procter & Gamble (Wednesday, Before Open), Texas Instruments (Thursday, After Close), and American Express (Friday, Before Open). 

Source: Earnings Whispers

Market Considerations

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

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

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

Source: FactSet, Morgan Stanley & Co Research, ISABELNET.com

Revenue growth estimates for 2024 are forecasted to grow by 4.9% (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. Following up with forecasts for 2025, which sound again very positive, with revenue to grow by 5.9% (5.8% on December 31st) and earnings to grow by 14.8% (14.8% on December 31st). Introducing forecasts for 2026, which sound again very positive, with revenue to grow by 6.4% (6.4% on December 31st) and earnings to grow by 13.6% (13.6% 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 chart from Goldman Sachs which reveals that markets are currently having a very high valuation relative to their past. In particular, the S&P 500 and the Nasdaq 100 appear right at the top, even though as I’ve said before, they don’t quite replicate the excesses of the fated 1999-2000. It is worth paying attention to though: when the 5-year average of the S&P 500 is a step away from 20x, you know we are not in a current normal situation. The second chart from Ryan Detrick shows us that it’s so difficult to have an ‘average’ year which many forecast 2025 to be, with a total performance ranging from 8-10%. Carson Investment Research displays results across the last 75 years, with only 4 of them which can be considered average years. What will happen next? Well, bulls can be happy, according to the third chart, as in 75% of cases, when you have two strong years in a row, a third strong year will eventually follow. The fourth and last chart tells us that even a bear like Morgan Stanley has had to catch up with consensus estimates for the S&P 500, with very solid growth from 2024 to 2026, and no recession.

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. The peace agreement in Gaza has now just come into effect, and President Trump can possibly broker a peace agreement between Ukraine and Russia. It is indeed positive that he likes the strong performance of the US Markets as a validation of his somewhat controversial policies.

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 2025: 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, with another interest hike as soon as next Friday. This year looks far less exciting for the Nikkei 225 and the Topix if the JPY is to have a revival due to rates being firm and on the increase 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 23.1% in little more than a year, with a notable Sharpe Ratio of 2.4

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

Our Global Income and Growth Portfolio is up 29.2% 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 13.1% 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.