The release of DeepSeek R1 shocks technology markets and puts Nvidia and Broadcom under pressure, although all US markets close January in the black. Europe shines again, and bonds have a respite with yields declining. Alphabet (Tuesday) and Amazon (Thursday) report this week. January’s labour report on Friday can shed light on future perspectives for rate cuts for the rest of the year. The BoE is likely to cut by 25bp on Thursday. 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 (20% 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 3rd – 7th February 2025

Economic data highlights of the week

Mon: CN – Markets Closed,  EU Manufacturing PMI, UK Manufacturing PMI, EU CPI, US ISM Manufacturing PMI, US Atlanta Fed GDPNow (1Q25)

Tue: US JOLTS Job Openings

Wed: EU Services PMI, UK Services PMI, EU PPI (12/24), US ADP Nonfarm Employment Change, US Services PMI, US ISM Non-Manufacturing PMI

Thu: NZ –  Markets Closed, UK Construction PMI, UK BoE Interest Rate Decision (2/25), US Initial Jobless Claims, UK BoE Governor Bailey Speaks, US Fed Balance Sheet

Fri: US Average Hourly Earnings (1/25), US Unemployment Rate (1/25), US Nonfarm payrolls (1/25)

Performance Review

Source: Google

InflectionPoint reports:

* The week started with the release of DeepSeek’s R1 version, a Chinese competitor to Chat GPT and Gemini which was praised for costing much less and using older, less demanding hardware. The heat was immediately felt by Nvidia and Broadcom, the leading producers of GPU chips for AI, fearing a slump in demand due to the rise of this alternative and a reduced capex by its usual clients. Of the two, Nvidia emerged worse for wear, amid news that its CEO Jensen Huang had a meeting with President Trump on Friday to update him on the state-of-the-art in AI. Elsewhere, earnings were mostly good; Tesla, Meta, and Apple all traded upwards after their release, while Microsoft was punished for slower-than-expected growth in its Azure business. Elsewhere, the ECB did oblige with another 25bp cut, while the Fed stayed put and sounded more hawkish than usual. Watch out for the EU’s CPI on Monday as a possible indication of how low the bloc’s central bank can possibly go. In other economic news, a somewhat disappointing GDP report for 4Q24 in the US clocked growth at 2.3% – below what was forecasted, but still much above anything that Europe might be able to produce in that department. The Fed’s favourite measure of inflation, the Core PCE Price Index, came in matching expectations at 2.8%. US equities managed to save their positive performance in January (recall ‘as goes January so goes the year’), but there is no denying that value is having a moment. Earnings growth for 4Q24 in the US have been upgraded again, to 13.2%, and now are getting in their sights the 14%+ rate forecasted early on, with one more key week to go. 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, benefitting from stable yields on US Treasury bonds. 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 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 Friedrich Merz will almost certainly win the elections, although he too will have to fend off the far right, represented by the Afd. It will be interesting to see if the new government will indeed reduce corporate taxes to relaunch the feeble economy. 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. However, 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.

* Value shone once more last week, with Europe and the Dow Jones the only major indexes adding to their tally. Growth was seriously disrupted by the DeepSeek cloud, and then later by disappointing earnings from Microsoft. It looks as though what the market wants to see now are reduction in interest rates, and these are only happening in the old continent at present. leading all American Indexes, in a positive week for Europe and Japan, too, notwithstanding the rate hike. No matter about Netflix, it looks as though the market’s rally is broadening, which is very positive. The USD managed to regain some of its strength and is trading just below 1.04 (parity in 2025 is something that could well happen). For 4Q24, the forecast for earnings growth is that they will increase by 13.2%, while the December 31st estimate stands at 11.8%. 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. 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. This week we’ll have a very important update from the labour report, which will likely influence the Fed’s future moves. We’ll have another important indication of inflation on Friday with the release of the Fed’s favourite gauge: the Core PCE Price Index. At this point, it looks as though the first cut will come in June (67.4%), even though Goldman Sachs is forecasting March. Strong earnings did come to the rescue and managed to save a positive close to January. 

*  In the latest revision, US 4Q24 GDP clocked at 2.3%, worse than expectations and pretty much in line with the average of the blue chips’ own prediction. The Atlanta Fed’s GDPNow prediction is for a 1Q25 growth of 2.9%, with the average of the blue chips above 2%, a very positive sign, and we’ll get an update next Monday. The not-so-diverging forecast of the New York Fed’s Nowcast is presently showing growth of 2.92%, a touch lower from 3.00% 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 was on hold in January and sounded much more hawkish. As a consequence, the first cut is forecasted in June or July (68.5% and 76.7% respectively), 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, particularly given the rise of the Chinese competitor DeepSeek. 

* Yields on US 10-year Treasuries have reached 4.54% 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 13.2%, vs 11.8% on December 31st. The current forward P/E ratio for the S&P 500 is 22.0x – and while it is higher than the 5-year (19.8x) 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 273.63, with a decline last week which I deem to be transitory, now a bit below consensus at 277.

Source: FactSet

* After a weaker 2.3% reading of US GDP for 4Q24, we are looking for decent forecasts for 1Q25, according to Atlanta and New York Federal Reserve Banks, The former’s GDPNow model is forecasting growth of 2.9%, with the Blue Chips consensus now above 2%. The latter’s Nowcast, which produces a less volatile forecast, showed growth in 1Q25 at 2.92%, down from 3.00% last week. While the estimates from the two Federal Reserve Banks are now diverging slightly, I consider that of the New York Fed to be more accurate. Earnings growth for 4Q24 is 13.2%, compared with a forecast of 11.8% as of December 31st. Revenue growth is slower, at 5.0% in 4Q24, vs 4.6% as of December 31st. For 2024, earnings growth is forecasted at 9.4%, vs 9.4% as of December 31st, with revenues coming in at 5.1%, 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 (January 2026) 20.99%. 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 20% 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 Alphabet (Tuesday, After Close), and Amazon  (Thursday, After Close). 

Source: Earnings Whispers

Market Considerations

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

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

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

Revenue growth estimates for 2024 are forecasted to grow by 5.1% (5.0% on December 31st) and earnings growth estimates for 2024 are predicted to grow by 9.4% (9.4% on December 31st), so the future looks bright. Following up with forecasts for 2025, which sound again very positive, with revenue to grow by 5.7% (5.8% on December 31st) and earnings to grow by 14.3% (14.7% 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 13.7% (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. 

Three highlights this week. First, we have a chart from Carson Investment Research which tells us that in 87.5% of cases, a positive January has been followed by a positive year, with an average performance of 18.4%. The second chart, also from Carson Investment Research, tells us that while, on average, February is a flat month, the second part can be tricky to navigate for the bulls, with increased volatility. That coincides with the end of earning announcements, and people start wondering about how 1Q25 is going to pan out. The third chart from Goldman Sachs tells us that while Mag 7 will continue to be dominant, their earnings growth will moderate over time, and be more in line with the S&P 493. That’s not necessarily bad for the market, especially if the 493 can step up their pace. 

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. The late Angelo Abbondio, an Italian legendary investor, used to say that you can rely on fundamental analysis and on technical analysis, but the most difficult thing was to decide when to prioritise the first, and when the second.

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, even though it is worth paying attention to the next developments post the hike, and whether the weakness in the JPY can continue despite the interest rate differential closing in with major economies.

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 22.8% 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 29.4% 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 13.7% since late February and has outperformed the FTSE MIB Index by 175bp in this timeframe, with a Sharpe Ratio of 1.3

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.