Market trading sideways, waiting for a breakthrough on trade; the US-China agreement is positive and gives hope for the future. Europe is strong, and Japan catches up. Very solid economic performance by the Magnificent 6 (-Nvidia) vs the S&P 493. Fed in a wait-and-see mode, watch out for US CPI on Tuesday. Upgrading Equities to buy, hoping for a smoother path for the rest of the year and solid economic and earnings growth. The biggest tail risk is the US Economy falling into a recession (30% chance in 2025), resurging inflation, revenues/earnings not matching forecasts, followed by damages done by tariffs/government policies, adverse geopolitical outcomes, and valuations (very high multiples).

Major market events 12th – 16th May 2025

Economic data highlights of the week

Mon: SG – Holiday

Tue: UK Unemployment Rate (3/25), IN CPI (4/25), US CPI (4/25), UK BoE Governor Bailey Speaks

Wed: JP PPI (4/25), DE CPI (4/25), SP CPI (4/25)

Thu: UK GDP (3/25), CH PPI (4/25), FR CPI (4/25), EU GDP (1Q25), US Retail Sales (4/25), US PPI (4/25), US Philly Fed Manufacturing Index (5/25), US Initial Jobless Claims, US Fed Chairman Powell Speaks, US Fed’s Balance Sheet

Fri: JP GDP (1Q25), EU Trade Balance (3/25)

Performance Review

Source: Google

InflectionPoint reports:

* Last week was a bit of a transition, but this week will start with a bang, as a trade agreement between the US and China has been achieved. This, first and foremost, will inject much greater confidence in the market than other important trade agreements can be reached as well. In this case, and if there is no or a limited disruption to trade, I think that some of the previous targets for the S&P 500 (beyond 6,000) can be revisited. Also, the USD is on a tear this morning, confirming Tom’s prediction that the currency’s fate was linked to a successful outcome for the trade agreements. Most investors suffered a double whammy on the markets and on the currency, and now are having a double relief, as we can watch from the performance monitor above, all of our markets are now within a 5% loss YTD, and the USD is quickly recovering as well. News that President Trump dispatched Secretary Scott Bessent to calm investors’ nerves at the Milken conference was well received. In recent news, the first reading of the US’ GDP for 1Q25 was negative, which convinced me that the best approach is to average the results of the Federal Reserve of Atlanta (whose forecast was negative) and the Federal Reserve of New York (whose forecast was positive). Earnings continue to be good and are almost doubling forecasts. As for the Fed, Chairman Powell did highlight a double risk to its mandate, that of rising inflation and rising unemployment, and this reset completely the expectations of a future cut,  even though 2 cuts are currently expected by December 2025. This is an important week as we will have US CPI on Tuesday, US PPI on Thursday, and Chairman Powell’s speech. Japan has gotten back in the game thanks to the resurgent USD and the weakening of the JPY, but we must bear in mind that the BOJ is in hawkish mode. Making a bold move and upgrading equities to buy (with the famous 3% weekly stop), due to a more positive scenario and a fewer/no disruptions on trade, keeping US bonds to hold, and European bonds to buy, and remaining positive on the CHF, which seems to be the only currency to hold its value no matter what (the SNB has one of the lowest interest rates among major countries at just 0.25%). 

* The reporting season is continuing, with 90% of S&P 500 companies having reported earnings, and so far is bringing optimism about the future. So are GDP numbers, with the Atlanta and New York Fed finally in agreement. The current P/E ratio of 20.5x is above the average P/E ratio of the last 5 years at 19.9x and the 10-year average at 18.3x. Even this latest figure, in my opinion, does not produce enough comfort to call for a bounce on valuation alone; a 16x multiple, or better still, a 14x multiple, would offer better entry points. The recent trade deal with the UK and the latest announcement that an agreement has been reached with China provide stability and optimism.  The S&P 500 so far has not touched the previous multiple high of 24x, and I think that record will still stand the test of time for a few more years. Given the capitulation from early this year,  I would love to think that we have seen the lows in 2025, leaving room to grow, even with a multiple which begins with a 2, but continue to diversify and use prudent risk management. 

*  The Federal Reserve was on hold in May, as expected, and mentioned that the outlook is becoming more complicated, despite some more benign inflation numbers; still, a reading of 2.6% is too high above the 2% target to begin easing, and it will continue to be data-dependent in the future. As mentioned before, all forecasts for future eases have been changed. June is no longer promising and looks like another hold (7.9%), July is no longer a certainty and looks like 50/50 (44.1%), September seems the first reasonable chance of a cut (78.6%). The forecast for December currently prices in 2 cuts, with rates at 3.75-4.00%, one less than forecasted by Goldman Sachs. 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).

* Yields on US 10-year Treasuries have reached 4.45% and were up last week, in line with most 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 2025 S&P 500 bottom-up earnings estimate is down to 265.46, still above the revised Goldman Sachs top-down estimate of 262.

Source: FactSet

* The Atlanta Fed GDPNow model is in positive territory after a negative reading for the GDP in 1Q25, with a new forecast of 2.3%, way above the Blue Chips consensus, which broke the 1% level and is currently around 0.8%.  On the other hand, the New York Fed’s Nowcast model, which produces a less volatile forecast, showed growth in 2Q25 at 2.42%, up from 2.34% last week. As mentioned, I believe it is prudent to make an average of those two forecasts to get to the real number; it is particularly good that these are now converging. Earnings growth for 1Q25 is now 13.4%, compared with a forecast of 7.1% as of March 31st. Revenue growth is slower, at 4.8% in 1Q25 vs 4.3% as of March 31st. For 2025, earnings growth is forecasted at 9.3% vs 11.1% as of March 31st, with revenues coming in at 4.9% vs 5.4% as of March 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 (March 2026) 26.32%. 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 30% 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 1Q24 is now coming to an end. Here’s a list of companies reporting this week. Highlights include: Cisco (Wednesday, After Close). Nvidia, the last of the magnificent 7 and the biggest contributor to earnings for the S&P 500, will report on May 28th, after close.

Source: Earnings Whispers

Market Considerations

Source: Bloomberg Finance L.P., Deutsche Bank Asset Allocation, ISABELNET.com

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

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

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

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

Revenue growth estimates for 2025 are forecasted to grow by 4.9% (5.4% on March 31st), and earnings growth estimates for 2025 are predicted to grow by 9.3% (11.1% on December 31st), so the future looks bright. Introducing forecasts for 2026, which sound again very positive, with revenue to grow by 6.3% (6.6% on March 31st) and earnings to grow by 13.5% (14.2% on March 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.  

Five highlights this week. First, we have a chart from Deutsche Bank, which offers an interesting recap of what happened in the past few months. The market traded sideways until there was a confirmation of a successful development in the US-China trade spat. The second chart from Goldman Sachs is a useful recap on valuations, which have returned to being quite extended. It means that from now on, economic growth, earnings growth, and buybacks, not multiple expansion, have to drive the stock market higher. The third chart, again from Goldman Sachs, reminds us of the superior earnings potential of the Maginificent 6 (as Nvidia hasn’t reported yet), relative to the rest of the market. You pay a higher multiple for a superior economic performance; these stocks are back in vogue and should offer a superior performance during an economic expansion environment. The fourth chart, again by Deutsche Bank, shows a strong correlation between announced and executed buybacks, which continue to remain strong this year. Amid the uncertainty, companies are continuing to focus on the shareholders and deliver value. And finally, the fifth chart, also from Goldman Sachs, shows the current forecasts for real GDP growth this year, with the American powerhouse a little above consensus.

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 was wrong 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. Let’s see if President Trump can possibly broker a peace agreement between Ukraine and Russia. 

I now recommend a long position in equities and a neutral position on US bonds. For EU Bonds, I advise going long, 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 perform much better in the last weeks. The revaluation of the USD brought new shine to the local stock market, which has a more palatable valuation than its US counterpart. You still have to deal with a hawkish BOJ – although I would think that they would prefer to hold off hiking, given the current environment. For the time being, the cautious stance persists, although the bounce is noted, and it could be extended given the more positive news and in the event of further capital flows out of the US.

Finally, Tom thinks that the current USD weakness can continue if the current maneuvering on trade goes on, but he’s positive if there is a breakthrough, as it looks like the one with China. Watch this space. At the moment, I think the 1.15 EUR bottom will hold. 

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 16.4% in about 1 1/2 years, with a Sharpe Ratio of 0.9

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

Our Global Income and Growth Portfolio is up 16.6% in about 1 1/2 years, with a Sharpe Ratio of 0.5

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

My Italian Equities Portfolio is up 30.4% in the last year and has outperformed the FTSE MIB Index by 880 bp in this timeframe, with a Sharpe Ratio of 1.4

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.