The Era of Easy Money?

Market Recap

The market continues to remain choppy but with an optimistic view. This week was more about China, than anything else. The PBoC and other financial authorities revealed a set of measures, some with specific aims to boost the stock market and the banks. The Politburo meeting, a day later, also focused on economic policies - something that’s. not within the norm.

This has led to Chinese stocks putting in a bottom for now, and we’re likely to see the rally continue, albeit with pullbacks along the way.

With the Fed easing relatively aggressively, it becomes easier for EMs to also start or re-start their easing cycle, when earlier they had to pause because the Fed held rates. This gives us reason to be overweight select EM equities.

Commodities are certainly having a lot of fun with all these easing and stimulus measures in the works. Crude Oil has some catching up to do. Despite an increase in geopolitical tensions, crude continues to languish, staying below the $70/bbl mark. The market is still looking at oversupplied conditions.

3Q Earnings Season Ahead

US 3Q 2024 Earnings Season is set to start in less than two weeks. JP Morgan will report on 11 October.

It makes sense to take a look at what we learned from earnings for the second quarter before we move on to Q3.

• We started to see the beginning of an earnings handoff, where the Revenue and EPS growth for the Mag 7 have started to slow down, while the rest of the market picks up.

• On average, we had a higher level of beats. According to GS, 56% of the S&P 500 companies beat EPS forecasts, which is above the long-term average of 46%.
• We saw softer revenues but relatively better EPS results, meaning margins are rising. According to SocGen, profit margins typically lead capex growth by 4-5 quarters, and tech profit margins are rising.

My biggest takeaway from the last earnings season was “investors finally want to know where their money is going”. Put another way, investors are questioning the capex spend made for AI in particular and want to know when we will see results.

Looking forward to the next earnings season, there are a few issues to keep in mind.

1. The US economy is slowing down: We’re not going to see a remarkable impact just yet, but we did see signs of the consumer being stretched during the previous quarter. The discount retailers, and home improvement store reported a slowdown in consumer purchases. But, Walmart and Target are doing very well. We noted that consumers are looking for convenience, a bargain and choice - all of which they can get at these two stores. But we also noted that both these stores have lowered pricing.
2. Margins may continue to improve: The labor market has come into better balance and therefore, the tightness that led to higher wages is dissipating. This means lower labor costs, and better margins.
3. Better balance between goods and services: We went from extremely high demand for goods, to a high demand for services. Pent-up demand for services is slowing, but goods demand may be picking up.
4. The Weaker Dollar will Help: The last three months have seen the USD weaken. With 41% of the S&P 500’s revenues coming from overseas markets, a weaker dollar will mean better translation gains.

Overall, EPS estimates for Q3 2024 declined by 2.8%, falling from $63.20 to $61.44 until 31 Aug, according to FactSet. This drop aligns with recent trends, where EPS decreases have ranged from 2.3% to 3.0%. Nevertheless, the drop seems to be led by the Mag 7.

Analysts, however, raised full-year 2025 EPS estimates by 0.3%, from $278.79 to $279.52. This suggests a near-term earnings decline, but growing confidence in longer-term corporate profitability as the economy stabilizes.

Closing Thoughts - Era of Easy Money?

With the Fed’s easing and now China, we’re set to enter an era of easy money. September brought us the largest number of central bank policy cuts since April 2020.

There are, however, still bumps in the road ahead. Fiscal policy is set to slow and the US markets remain overvalued. Nevertheless, we’re still biased towards equities over bonds.

With the Fed alleviating concerns about being behind the curve, our focus now turns to US elections.

While the Presidential candidates are neck and neck in the polls, the market is likely not expecting a sweep, bringing some relief. A divided Congress means we may see slower implementation of the more extreme policies, which is better for markets.

Have a great week ahead!

None of the above is Investment Advice. I may or may not have positions in any of the stocks or asset classes mentioned. I have no affiliation with any of the companies other than explicitly mentioned. For more information, please visit www.macrovisor.com