Better than expected US CPI and PPI can’t stop the slide, continuing for the 4th week in a row. The next week will see four of the most important central banks of the world (Fed, BoJ, BoE, and  SNB) decide on interest rates; their outlooks will be very important. S&P 500’s valuation is now in line with the 5-year average, but that might not be enough to offer support to the market. 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), resurging inflation, revenues/earnings not matching forecasts, followed by damages done by tariffs, adverse geopolitical outcomes, and valuations (very high multiples).

Major market events 17th – 21st March 2025

Economic data highlights of the week

Mon: CN Unemployment Rate (2/25), CN Industrial Production (2/25),  US Retail Sales (2/25), EU ECB President Lagarde Speaks, US Atlanta Fed GDPNow (1Q25)

Tue: EU Trade Balance (1/25), CA CPI (2/25), US Industrial Production (2/25)

Wed: JP BoJ Interest Rate Decision, EU CPI (2/25), US Fed Interest Rate Decision, FOMC Economic Projections

Thu: JP – Holiday,  CN PBoC Loan Prime Rate (3/25), DE PPI (2/25), CH SNB Interest Rate Decision, UK BoE Interest Rate Decision, UK BoE Governor Bailey Speaks, US Philly Fed Manufacturing Index (3/25), US Initial Jobless Claims, US Fed Balance Sheet 

Fri: ZA – Holiday

Performance Review

Source: Google

InflectionPoint reports:

* Another difficult week for equities in a downturn that seems to have no end. Despite a positive surprise from both the US CPI and PPI, and a considerable bounce on Friday, the Vix is on the rise this morning signalling more trouble ahead. Oracle managed to slide despite positive comments from its President, Larry Ellison, who quoted great demand from clients. But the biggest move last week was that of respected Goldman Sachs’ Chief US Strategist David Kostin, who in a report lowered the target for the S&P 500 to 6,200 from 6,500, quoting a lower-than-expected GDP growth forecasted by Goldman Sachs’ Chief Economist Jan Hatzius. That would be a material change in the forecast; look closely at the FOMC’s statement on Wednesday to see if they agree. What strikes me as slightly unusual is that Kostin did not have to lower his target at this point; his was one of the most moderate forecasts on the street. Importantly, he lowered the multiple at which the market is going to trade by the end of the year, and we’re almost there, as the current multiple is now just shy of 20. Other than just marking to market, as it has been suggested by John Authers of Bloomberg, I suspect he had very good reasons for the change because it would be difficult to raise the target again if the market recovers during the current year. Much will depend on the policies decided by the Trump administration, with the creation of a possible Sovereign Wealth Fund being considered by Scott Bessent and Howard Lutnick. It will take some time to see the consequences of the policies the new US Government has decided to implement, while in Europe, there are lots of discussions about defense spending and debt. Meanwhile, the ECB might have finished easing, with a cut in the April meeting now nearing 50/50; this week’s EU CPI can help to understand how much room the Central Bank has. Meanwhile, the USD has continued to depreciate and now is nearing 1.09 versus the Euro, after jumping from 1.05 to 1.08 in a single week. At the same time, there is an increasing worry that the US Economy is about to enter a recession (again!), which has pushed prices lower; the mood remains atrocious, and the CNN Fear and Greed Index is still flashing Extreme Fear. This would be the time to buy, in theory – in practice, no one wants to increase risk at the current levels, and most are licking their wounds. Trumponomics, tariffs, geopolitical scenarios, and the Atlanta Fed’s revised forecasts contributed to this dystopian scenario. In this immense confusion – as Beckett would have put it – I prefer to stay on the sidelines and watch what happens from one day to the next. This week, we will have important updates on Tuesday, courtesy of the US Industrial Production, on Wednesday, with the Japanese and then the US Interest Rate decisions, and finally on Thursday, when it will be the turn of the Swiss and British Central Banks. The biggest worries for (US) markets are recession, tariffs, earnings, valuations, and a further escalation in the geopolitical scenario. Keeping equities to hold, confirming US bonds as buy, downgrading European bonds to hold, and remaining positive on the CHF, which seems to be the only currency to hold no matter what, even though the SNB will likely again lower the interest rate to 0.25% on Thursday. While the ‘earthquake’ (as I used to call a violent retrenchment or sector rotation) continues, and it may last beyond the usual two weeks, I would sell any European winners that managed to hold admirably so far, apart from defense stocks. 

* Last week, at least we had a few positive days, but the overall trend is negative, and the market is now in a correction. The current P/E ratio of 19.9x is more or less in line with the average P/E ratio of the last 5 years at 19.8x, so there could be a technical rebound, or at least some support along these levels, also counting on positive seasonality. I believe that the FOMC projections and the intentions of the Federal Reserve regarding when to ease will be paramount. As mentioned previously, the USD continues to be weak and is now trading close to 1.09. 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 19.9x, 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. If and when the multiple gets in line with the 5-year average, at 19.8x, there could be a technical rebound, but even using this multiple as a long-term average is preposterous and unlikely to last. Even the 10-year average of 18.3x cannot offer a sense of security. From a valuation perspective, the (US) market has lots more to fall. The slide so far has been pretty orderly, without a capitulation, which usually helps to form a low from which to start again. Be careful when the S&P 500’s multiple begins with a 2 because every downward movement will be painful and likely amplified.

*  In the latest revision, the US 4Q24 GDP clocked at 2.3%, confirming expectations and pretty much in line with the average of the blue chips’ own prediction. The Federal Reserve obliged with another 25bp cut in December but is now operating with a much greater degree of care; it was on hold in January and sounded much more hawkish. While it is very unlikely that it will cut again in March (1%), May is probably too early (29.1%), while June looks like a solid place to start (76.9%). The forecast for December currently prices in 3 cuts, with rates at 3.50-3.75%, in line with Goldman Sachs’s view. Be wary of aggressive Fed cuts because they might signal an upcoming recession; non-recessionary interest rate eases are always welcomed 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, while America’s once Magnificent 7 are now slumping.

* Yields on US 10-year Treasuries have reached 4.28% and were mostly in line last week, while European government bond yields were mostly stable to slightly down. 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 19.9x – 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 271.20, 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 the New York Federal Reserve. The Atlanta Fed GDPNow model is very much still in negative territory with a new forecast of -2.4%, way below the Blue Chips consensus that is stable above 2%. On the other hand, the New York Fed’s Nowcast model, which produces a less volatile forecast, showed growth in 1Q25 at 2.69%, up from 2.67% last week. Introducing a 2Q25 forecast of 2.66, up from 2.58% 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 1Q25 is 7.1%, compared with a forecast of 11.6% as of December 31st. Revenue growth is slower, at 4.2% in 1Q25 vs 5.1% as of December 31st. For 2025, earnings growth is forecasted at 11.5% vs 14.1% as of December 31st, with revenues coming in at 5.4% vs 5.8% as of December 31st. Finally, it’s worth noting 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) 22.95%. 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 is now nearing its end. Here’s a list of companies reporting this week. The highlights are Micron and Nike (Thursday, After Close), as it can give us an early indication of how US companies performed in 1Q25

Source: Earnings Whispers

Market Considerations

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

Source: DB Asset Allocation, Deutsche Bank, ISABELNET.com

Source: Carson Investment Research, FactSet, ISABELNET.com

Source: Bloomberg, BofA Merrill Lynch, ISABELNET.com

Revenue growth estimates for 2025 are forecasted to grow by 5.4% (5.8% on December 31st), and earnings growth estimates for 2025 are predicted to grow by 11.5% (14.1% on December 31st), so the future looks bright. Introducing forecasts for 2026, which sound again very positive, with revenue to grow by 6.5% (6.4% on December 31st) and earnings to grow by 14.2% (13.7% 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 Goldman Sachs which reminds us that, even in the current downturn, valuations remain high historically. Simply put, we cannot count on valuations to provide a floor for the market, even though I believe the current issue is more related to adverse sentiment than valuation itself. The second chart from Deutsche Bank shows us that equity positioning has further deteriorated, meaning that investors are now risk-off – and the current setup is about halfway through when trade frictions first resurfaced during the first Presidency of Donald Trump. Unfortunately, while some progress has been achieved, it could slide further. The third chart, from Carson Investment Research, tells that the correction we have just witnessed is one of the fastest in history – requiring only 16 trading days to go from an all-time high to -10%. He says that only in 2000 the performance for the rest of the year was negative, so that should bring some hope. Finally, the fourth chart, from Bloomberg and Bank of America Merrill Lynch, points to the level where their strategist Michael Hartnett would buy the market, 5300. That’s another 6% below current levels.

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, a legendary Italian 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 it is 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 neutral position in equities and a long position on US bonds. For EU Bonds, I advise waiting for even better yields, while I still suggest putting together a portfolio that includes the yield of Italian Bonds and the safety of German Bunds, without neglecting Corporate Bonds. 

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, tariffs, and resurging inflation; 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. This week it’s unlikely that the Bank of Japan will raise rates, not to shock a turbulent market already dealing with trade restrictions and higher prices.

Portfolios

Finally, I want to introduce three portfolios that 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 16.6% in little more than a year, with a Sharpe Ratio of 1.4

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

Our Global Income and Growth Portfolio is up 14.7% in little more than a year, with a Sharpe Ratio of 0.7

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

My Italian Equities Portfolio is up 25.6% in the last year and has outperformed the FTSE MIB Index by 700+bp in this timeframe, with a Sharpe Ratio of 1.8

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 own investment analysis and research and/or seek the advice of a licensed professional with direct knowledge of the reader’s specific risk profile characteristics.