OVOM Research: July 2024 Markets Overview & Asset Allocation Strategy

July 2024 Global Asset Market Heatmap: US Large-Cap Equities Lead, Commodities & Precious Metals Largely Lag

On a monthly basis, it appears US equities – specifically large-cap speculative tech & growth mega-caps – led, while precious metals & commodities lagged. Despite that outcome, our longer-term thesis remains skeptical of the US equity market at the current valuations, as well as positive regarding precious metals & broader commodities.

US Equity Market Overview

While the US equity market continues to do well at the index level, our current thinking remains skeptical of a longer-term bull market with market leadership broadening out. EPS estimates remain aggressive, while fundamental performance even at the index level is similarly driven by around a handful of stocks. Multiple metrics we looked at below confirm market leadership is the narrowest since the early 2000’s tech bust, or even more so according to some metrics. Given this dynamic, we think it’s likely retail investors and portfolio managers alike are too committed to the “AI mania”. A lot of market participants continue to chase a backwards looking dream, which we continue to suspect will result in a chaotic selloff once the US economy sees economic disappointment.

Case and point number 1: NVIDIA. We created a reverse DCF (Discounted Cash Flow) model to calculate the FCF (Free Cash Flow) already priced into NVIDIA’s $3.355T market cap valuation. As shown below, NVIDIA’s current market value has an implied free cash flow of over $780B by 2033; a completely impossible feat.

In addition to NVIDIA, we wanted to highlight one additional individual equity to watch: Eli Lilly. We feel outside of the “AI story”, Eli Lilly is probably amongst the most overpriced mega-caps in the US equity market. Nearing a market cap of $1T, LLY is currently priced near 130x earnings, which is quite unheard of for a health care stock. The total addressable market of LLY’s businesses is nowhere near $1T. In fact, it’s expected to be around $150B-$200B by 2030 (according to NOVO Nordisk CEO), which makes us seriously question what the market has priced into LLY’s current valuation.

The remaining charts below highlight our feelings on earnings estimates likely being overstated even outside of what we view as an elevated likelihood of recession, as well as narrow market leadership, and extremely high valuations relative to history.

US & Global Macro Overview

There’s been a lot of talk about the US labor market being secularly tight, as well as the inverted yield curve no longer mattering post-C19. We don’t believe either of those assessments are accurate. In fact, historically the yield curve typically remains inverted while the US labor market remains “resilient” – or at least resilient enough to avoid a recession. Weekly claims have been trending higher and the yield curve has gradually been un-inverting this past month. It’s mostly been from twist steepening, which can be recessionary, but to be fair not as much historically as bull steepening (typically considered the most recessionary yield curve dis-inversion).

If history is a guide – in terms of US equity market performance at different yield curve moves – we should expect more value names to begin outperforming.

We continue to see deflation ahead. The latest housing market data, as well as new orders and other economic activity data are key leading indicators confirming deflation in labor and manufacturing is ahead.

We Believe a Commodities “Supercycle” Remains a High Probability

For reasons we’ve previously stated, we believe a commodities “supercycle” – led by precious metals – remains a high likelihood. Primarily starting with the structural bear market in longer-term US Treasuries and continuing with the three “triple threats” stated below, we feel precious metals & commodities will continue to outperform on a longer-term basis.

Despite many broader commodities still lagging inflation and certainly the US equity market’s performance, the lack of allocation from broader asset/portfolio managers remains a positive longer-term sign for us.

Lastly, we think it’s important to note that the “issues” with valuations and technology leadership in the US equity market are very similar when it comes to global equities.

July 2024: OVOM Research Asset Allocation Strategy

While we recognize the current bear market in US fixed income, particularly in longer-term US Treasury’s, we believe interest rates have peaked and therefore when the Fed cuts rates it’ll stimulate the US fixed income market to some degree. Aside from that we remain neutral on equities and overweight on precious metals & commodities.

When it comes to the US equity market in particular, Utilities had a rough June, but we remain bullish in the longer-term. Based on the scatter plot below, it’s clear Utilities remain the most underpriced segment in the S&P 500 relative to 2024 YTD earnings revisions.

July 2024 Asset Allocation Breakdown

Thank you as always for taking the time to read and participate in my monthly markets’ newsletter. Hope you enjoyed this month’s update and if you have any questions, feedback, concerns, etc., please don’t hesitate to email me at:

[email protected]

You can also follow me on Twitter at: x.com/oloutsenko

Best of luck to all market participants this upcoming week, month, & year!

Disclaimer: The information and publications are not meant to be, and do not constitute, financial, investment, trading, or similar advice. The material supplied is not intended to be used in making decisions to buy or sell securities, or financial products of any kind. We highly encourage you to do your own research before investing.

Disclaimer: Returns from ETFs do not match the index they’re meant to track on a 1:1 scale. ETFs contain shares of securities comprising a given market metric an ETF is tracking and the composition of the ETF is often not identical to the index its tracking. For example, SPY (SPDR S&P 500 ETF) tracks the S&P 500. A committee ultimately agrees on the companies from the S&P 500 included in the ETF, using guidelines including liquidity, profitability, & balance.

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