Big Micro and Big Macro This Week
What happened last week?
- The S&P 500 rose 1.06%
- The Dow Jones gained 0.65%
- The Nasdaq advanced 0.94%
This week has it all. On the micro front, five of the “Magnificent 7” firms will release their reports as well as two energy giants. In all, 106 S&P 500 companies, including six Dow stocks, will report.
On the macro front, the Fed is expected to leave rates unchanged on January 31 but provide guidance on the conditions for a rate cut and tapering its Quantitative Tightening (QT) program.
3 Things to Know
The Normalization of the Global Economy Is Underway
As we enter 2024, equities are outperforming bonds and US equities are outperforming global shares, both in line with our asset allocation.
US equities have returned +2.5% in the year to date and US fixed income -1.2% vs 0.9% for global equity and -2.3% for global fixed income.
After two years of powerful interest–rate driven valuation improvements, we see corporate earnings as the decisive factor to drive further equity returns in 2024. Until such time as we have visibility on estimated Earnings Per Share (EPS) gains in 2025, realized corporate earnings will be a main mover of markets in 2024.
A complex “dance” between management, analysts and investors is taking place.
In the US, 4Q23 EPS estimates are far weaker than any deterioration reported for the US economy. Even with lingering areas of weakness in the US economy, this bodes well for future realization of 2024 profit estimates.
Economic Impediments Will Not Last Forever
The world economy is enduring drags in cyclical industries including trade, manufacturing and property.
Asia, Europe and Latin America are more trade dependent than the US. The impact of real estate and manufacturing activity declines are 2–3x larger for China than for the US.
Current drags on economic activity will not endure indefinitely.
We see a reversal in monetary policy tightening unfolding across the globe at different times and rates. More importantly, in our view, will be the end of inventory corrections that will sustain a global trade recovery. We believe this is likely to begin before the end of 2024. The US was harmed least and will benefit less from the improvement in global trade.
In terms of risks, global supply shocks remain our largest concern. Recent news that the Red Sea has become practically impassable fits that narrative. As we discussed in our Wealth Outlook 2024 , this keeps us disposed to allocate slightly less aggressively toward equities and within equities, toward sectors such as energy. Overall, we are expecting global growth to broaden across most regions by 2025.
Equities Broadening as a Theme
Equity markets have been riding momentum over the last three months. The S&P 500 has surged by 19% from the low levels in October, when a premature Fed pivot has been aggressively pricing in by the markets.
The bulk of that performance still came from the so–called “Magnificent 7” US tech giants. These firms have historically fast–growing profits despite their mega cap valuation (two are worth about US$3 trillion).
But we have seen signs of improving market breadth as our tactical calls played out. Our favored equities — quality growth shares in small and mid–caps, as well as equal-weighted S&P 500 have been rising, with small cap growth outperforming the S&P 500 since November 2023.
We continue to see opportunity in global equities markets through broadening earnings and equity performance beyond large cap US tech.
As outlined in our Wealth Outlook 2024, Citi favors thematic investing over regional investing. As the peak of earnings season starts to kick in in the following days, some of our high conviction thematic investments, including semiconductor equipment and cyber security, have outperformed the Magnificent 7 (“Mag 7”) YTD as companies realized turnaround in earnings reports and guidance.
We see potential opportunities in broadening healthcare investments to include equipment and biotech. We continue to see cyber security and semiconductor equipment as particularly strong niches.
See our weekly CIO Strategy Bulletin for more details