Back in black: equities perform a strong rebound, while bonds end mostly unchanged. Benign CPI and PPI do not change the Fed’s plans much. Earnings continue to be strong. Moody’s downgrades US credit rating, with effects to be felt next week. If there is no recession, it’s always better to hold your positions during market turbulence.  The biggest tail risk is the US Economy falling into a recession (35% 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 19th – 23rd May 2025

Economic data highlights of the week

Mon: CA – Holiday, CN Industrial Production (4/25), CN Unemployment Rate (4/25), EU CPI (4/25)

Tue: CN PBoC Loan Prime Rate (5/25), AU RBA Interest Rate Decision, DE PPI (4/25), CA CPI (4/25)

Wed: JP Trade Balance (4/25), UK CPI (4/25)

Thu: UJP Services PMI (5/25), FR Manufacturing PMI (5/25), DE Manufacturing PMI (5/25), EU Manufacturing PMI (5/25), EU Services PMI (5/25), UK Manufacturing PMI (5/25), UK Services PMI (5/25), US Initial Jobless Claims, US Manufacturing PMI (5?25), US Services PMI (5/25), US Fed’s Balance Sheet

Fri: JP CPI (4/25), UK Retail Sales (4/25), DE GDP (1Q25)

Performance Review

Source: Google

InflectionPoint reports:

* Back in Black. Equities were roaring globally, with the US (and technology) shining brightly. The market started strong on the back of the US-China agreement, and then picked up from there, with the Nasdaq at the forefront (as it usually is on good days). The USD made great progress against the EUR as well, even though foreign investors in American equities are still suffering from its fall from grace. While achieving an agreement on trade with China and the EU is of paramount importance, there are a few signs that the US Administration is being more flexible and is at least talking to its counterparts. And while earnings are strong and boosted once again after Cisco’s good report on Wednesday, the multiple is back to a remarkable 21.4x. You can almost say it is indeed priced for perfection. The big news is Moody’s downgrading the US Debt late on Friday; we shall see what effect this has on the markets. Losing the coveted AAA rating is regrettable, but the US is still a very solid borrower, even though the impact will likely be felt somehow.  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; Goldman Sachs reduces their odds of a US recession to 35% from 45%. Keeping 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 92% 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 21.4x 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; but inflation (both CPI and PPI) is softening and coming in below forecasts for the second month in a row. It will continue to be data-dependent in the future. June is no longer promising and looks like another hold (8.3%), July is no longer a certainty and looks like 50/50 at best (36.8%), while September seems the first reasonable chance of a cut (74.4%). 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 4.44% and were slightly up last week, in line with most European government bond yields. In both cases, yields came up in the beginning of the week and eventually flattened on Friday. 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 265.02, still above the revised Goldman Sachs top-down estimate of 262. It is concerning to note that, while for 1Q25 earnings are strong, there is a continued reduction of those for the full year, which means that analysts are expecting a slowdown later on. A useful indication can come in June from Oracle’s quarter, which will be the first company to report on how things were for them in April and May.

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 2.4%, up from 2.3% last week. The Blue Chips consensus managed to move above the 1% level and is currently around 1.05%.  The New York Fed’s Nowcast model has an almost identical forecast of 2.35%, down from 2.42% last week. 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 13.6%, 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 9.0% 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 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 1Q24 is now coming to an end. Here’s a list of companies reporting this week. Highlights include: Baidu (Wednesday, Before Open). 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: Goldman Sachs Global Investment Research, ISABELNET.com

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

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

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

Source: Bloomberg, 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 9.0% (11.1% on December 31st), so the future looks bright. Introducing forecasts for 2026, which sound again very positive, with revenue to grow by 6.2% (6.6% on March 31st) and earnings to grow by 13.4% (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 Goldman Sachs, which shows that the market’s assessment of future growth has been strong lately. A positive resolution to trade issues and an improving geopolitical scenario are the drivers of this. GS forecasts a slowdown in 4Q25 – let’s continue to watch the GDP forecasts very closely. The second chart, also from Goldman Sachs, shows a renewed confidence in earnings, which is not yet shown in bottom-up models. Certainly, earnings for 1Q25 are strong and well above forecasts, but we will have to check what’s on for 2Q25, starting from Oracle as suggested. The third chart, again from Goldman Sachs, shows that in times of turbulence, if there is no recession, the best is to hold on to your positions, as usually a strong recovery will ensue. The fourth chart, also from Goldman Sachs, points to over $1Tn of buybacks for S&P 500 companies in 2025, reinforcing the bullish case. Finally, the fifth chart from Bloomberg points to the S&P 500 regaining the 200-day moving average. That is usually a good long-term indicator and points to further upside, provided that the credit downgrade does not spoil the party.

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 17.5% in about 1 1/2 years, with a Sharpe Ratio of 1.1

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

Our Global Income and Growth Portfolio is up 17.8% in about 1 1/2 years, with a Sharpe Ratio of 0.7

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

My Italian Equities Portfolio is up 33.5% in the last year and has outperformed the FTSE MIB Index by 870+ bp in this timeframe, with a Sharpe Ratio of 1.5

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.