Weak US data (Consumer Confidence and Services PMI) prompts a wave of selling on Friday, ending the week in the red for equities. Bond yields were mostly down, with the USD a touch weaker against the EUR and now back to above 1.05. This is the last week in February, so look to greener pastures in March. Crucial this week will be Nvidia (Wednesday, After Close), US GDP on Thursday, and the Core PCE Price Index on Friday. The German Elections went very much as forecasted and are good for the markets, even if some conflicts in the upcoming coalition will inevitably arise. 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 (15% chance in 2025) or revenues/earnings not matching forecasts, followed by damages done by tariffs, adverse geopolitical outcomes, and valuations (very high multiples).

Major market events 24th – 28th February 2025

Economic data highlights of the week

Mon: EU CPI (1/25)

Tue: DE GDP (4Q24), US CB Consumer Confidence (2/25) 

Wed: IN – Markets Closed, DE GfK German Consumer Climate (3/25)

Thu: CFR PPI (1/25), CH GDP (4Q24), ES CPI (2/25), DE Unemployment Change (2/25), US Initial Jobless Claims, US GDP (4Q24), JP CPI (2/25)

Fri: DE Retail Sales (1/25), FR GDP (4Q24), FR CPI (2/25), IN GDP (3Q24), DE CPI (2/25), US Core PCE Price Index (1/25), CA GDP (4Q24), US Atlanta Fed GDPNow (1Q25)

Performance Review

Source: Google

InflectionPoint reports:

* An unexpected double whammy on Friday – courtesy of the Michigan Consumer Expectations and Services PMI – triggered a wave of selling, bringing the week to a close in the red. These are the early reflections about President Trump’s tariffs, which consumers realise will inevitably bring inflation and higher prices. A decline in the Services PMI pointed to a weakness in the economy, while the Fed’s hands are tied by the data. We will have some more this week, with a revision to the US 4Q24 GDP on Thursday, and the US Central Bank’s favourite measure of inflation, the Core PCE Price Index on Friday. Elsewhere the elections in Germany turned out not too differently from expectations – the CDU/CSU won, AfD rose to just over 20%, and the SPD lost further ground, but markets hope that the new chancellor Friedrich Merz will be able to form a two-party government, and will eventually reach the majority of 66% necessary to release the debt brake to increase borrowing (and therefore spending) more than currently enshrined in the constitution. Much of this spending will go towards defense; Leonardo on Friday reported better than expected numbers and raised its outlook for 2025. There also will be a review of the immigration policy, which has been criticised by many in the country. It will be interesting to see if the new government will indeed reduce corporate taxes to relaunch the feeble economy. Europe was once again the leading market last week and so far has put forward an impressive performance, so much that many are asking themselves if all the good news is already priced in. I am glad that US markets did not fall by 3% or more which would have granted a change in recommendation which I feel is unnecessary at this point. However, the markets should recover or even simply remain stable (but they never are!) this week to keep the upward trend intact. I wrote in the last couple of weeks, quoting pieces from Carson Investment Research and Ryan Detrick, that the markets seem to perform poorly in the second half of February, bearing in mind that Nvidia reports on Wednesday after the close, and its guidance, more than the report, can set the tone for the rest of the week. In the US, earnings reports are continuing to impress, with the forecast being raised once again, and beating the once fiendish forecast of Sep 30, 2024, which accounted for a growth of over 16%. In Europe, the baseline scenario is that the ECB must continue to cut rates and provide massive amounts of liquidity to revive the ailing economies, while European equities are shining ever-so-brightly. 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. 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, tariffs, 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). 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.

* Last week was a triumph of value over growth, as always is when the markets are down. Interestingly, the S&P 500 managed to hold its own against the Dow Jones, while the Nasdaq slipped but still managed to retain the crown of the best-performing market (among those I follow) in the US on a YTD. The USD lost a little against the Euro and is now hovering above 1.05. 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 22.2x 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 500’s multiple begins with a 2.  

*  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. We will get another update on Thursday. 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 (59.2% and 68.4% respectively), with 2/3 cuts currently seen in December 2025, with rates at 3.50-4.00% by then, against a Goldman Sachs prediction of 3 cuts. 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, and the fact that Chinese technology is having a momentous comeback.

* Yields on US 10-year Treasuries have reached 4.43% and were mostly slightly down last week, in line with 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. The current forward P/E ratio for the S&P 500 is 22.2x – and while it is higher than the 5-year (19.8x) average and the 10-year average (18.3x), 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 271.45, with a decline last week which I deem to be transitory, now a bit below consensus at 277. Meanwhile, the 2024 earnings had an upward revision to 241.37 not too far from the consensus at 242. 

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 2.3%, stable from last week, with the Blue Chips consensus now above 2%. The latter’s Nowcast, which produces a less volatile forecast, showed growth in 1Q25 at 2.95%, down from 3.02% 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 16.9%, compared with a forecast of 11.8% as of December 31st. Revenue growth is slower, at 5.2% in 4Q24, vs 4.6% as of December 31st. For 2024, earnings growth is forecasted at 10.2%, vs 9.4% as of December 31st, with revenues coming in at 5.2%, 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) 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. The highlight is obviously Nvidia (Wednesday, After Close)

Source: Earnings Whispers

Market Considerations

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

Source: Goldman Sachs Prime Services, Goldman Sachs Global Investment Research, ISABELNET.com

Source: Goldman Sachs Global Investment Research, ISABELNET.com

Source: Carson Investment Research, FactSet, ISABELNET.com

Revenue growth estimates for 2024 are forecasted to grow by 5.2% (5.0% on December 31st) and earnings growth estimates for 2024 are predicted to grow by 10.2% (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 5.5% (5.8% on December 31st) and earnings to grow by 12.7% (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 13.9% (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.  

Four highlights this week. First, we have a chart from Carson Investment Research, which reminds us that bull markets last longer than we might think – a median of 60 months and an average of 67 months compared to the current length of 28 months, so it could still be early days. The second chart from Goldman Sachs tells us that the leverage of most hedge funds is high; this enhances the possibility of a bloodbath if the markets start going South (as they did last Friday). The third chart, also from Goldman Sachs, focuses on the likelihood of adoption and productivity improvements (a very heated topic back in 99-00 with the start of mass internet deployment) by country, and the chart sees the US, the UK, the Euro Area, and Japan as prime beneficiaries of this disrupting trend. The fourth chart, from Carson Investment Research, tells us that Friday and Monday have been mostly in the red since the beginning of the year, which leads me to conclude that the best day to buy (US) stocks is indeed on Monday.  

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 damage to the economy and trade done from Trumponomics and tariffs; iii) any negative geopolitical outcome (which could see an expansion of the current conflicts); and iv) valuations, which are nearing levels only seen once before (at least during my lifetime!). 

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. In the past weeks, the JPY has enjoyed a strong ride and put all other currencies – and the Nikkei 225 – under pressure.

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 23.2% in little more than a year, with a notable Sharpe Ratio of 2.3

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

Our Global Income and Growth Portfolio is up 28.3% in little more than a year, with a Sharpe Ratio of 1.6

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

My Italian Equities Portfolio is up 20.8% in the last year and has outperformed the FTSE MIB Index by 285bp in this timeframe, with a Sharpe Ratio of 1.6

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.