The Final Stretch

As we enter the final stretch of the year, there are a few things to consider. As we enter the final stretch of the year, there are a few things to consider. The next two weeks will bring us quite a bit of volatility not just in the US but globally as well.

This week, we start off with the Japanese elections, followed by the BoJ meeting on Halloween. We also have US jobs data coming out throughout the week, ending with the US Unemployment Report on Friday.

And we also have 5 of the Mega Cap tech reporting this week, which we discuss in more detail below.

The following week, in November, we have the US Elections, the Fed and the Bank of England’s rate decisions. China will also hold their National People’s Congress (NPC) meetings throughout that week, Nov 04 - 08, and everyone is hopeful that they will confirm the size of their stimulus during this meeting. This is the meeting to do it.

If you ask me, I think the two most important events in the next two weeks are the US elections and China’s NPC meetings. Both these events are massive market-moving events and will set the course, not just for the final two weeks of the year but also the next year.

More stimulus also makes the Fed’s job harder in terms of rate cuts, because we could see a resurgence in global inflation.

In terms of equities, the fourth quarter is still the second-best performing quarter, even in an election year, according to JP Morgan. And we’re likely to see the S&P 500 hit new record highs, again into the end of the year, as the market breathes a sigh of relief after the US election, regardless of who wins. And if China’s stimulus numbers don’t disappoint, that will add to the rally.

One big reason is the economy. The US economy is proving to be much stronger than expected, at least from a macro data standpoint. The Atlanta Fed has the GDPNow growth tracker at 3.3% as of October 25, 2024. That’s still significant strength. The Citi Economic Surprise Index shows that the US data has been surprising to the upside over the last few weeks.

People continue to expect a recession because the Fed has rarely pulled off a soft landing. More often than not, a Fed Rate Cutting Cycle has been accompanied by a recession. This time may actually be different.

And with that we have yields moving higher because of a strong economy and the idea that inflation will be coming back. In the last week or so, more investors have been pricing in a Trump victory, and part of that means “inflation trades”, as Paul Tudor Jones put it.

We’ve talked about both candidates having inflationary policies but if we start to see lower taxes, more restoring, and higher tariffs - all this could lead to inflation and a larger fiscal deficit. According to various models, Trump’s policies could raise the fiscal deficit by $4.5T to $5T in the next decade.

That’s the other reason we’re seeing higher yields. There’s likely going to be a greater need for bond issuances to tackle this fiscal spend/deficit. More bond supply = lower prices = higher yields. This is another reason that the US Dollar has been rallying.

Every major analyst believes a Trump victory could lead to a stronger US Dollar.

I’m sure they are right but somewhere in the back of my head, I’m thinking that we may see lower demand for US assets given Trump’s policies and the uncertainty that they may bring. That would likely be negative for the US Dollar. This is, however, a contrarian view. Time will tell if this view pans out.

Closing Thoughts - Big Earnings

Speaking of the final stretch, this is also the last set of earnings for this calendar year. About 41% of the market cap of the S&P 500 report earnings next week, so we’re bound to have some fireworks.

Earnings expectations have been revised lower, and that’s helping with some of the beats. In terms of earnings growth, we’re still at 3.6% blended growth, which is below the estimate of 4.3% for the quarter. However, reports next week could very well change that.

Last quarter, earnings for the Mag 7 became a “show me” story. Investors finally started asking what the companies were doing with all the Capex investments and how AI would be driving growth.

I suspect this time will be no different. We’ve heard a lot about the prospects of AI, now we want to see tangible outcomes. We want to know that AI is contributing to the top and bottom lines.

Another aspect that was flagged last time was the reduction in the pace of capex by these companies. Many took that to mean that the AI narrative is dying down. While that may not be entirely true, as we’ve heard from other peripheral AI companies, there is some staleness in the discussion.

More specifically though, what we will be watching is:

• Apple: iPhone growth
• Microsoft: Azure growth
• Amazon: AWS, e-Commerce and Digital Ad Sales
• Alphabet: YouTube and Search Ad Revenue
• Meta: Ad Revenue and ROI on AI

The bar is set quite low and so we may actually see beats all around, but I think investors will still be digging through the numbers and the discussions. After all, we have to at least try to justify some of those lofty valuations.

Have a great week out there!

None of the above is investing advice. I may or may not have investments in the names mentioned above. Please visit www.macrovisor.com for more details.