Above, I have added the performance for Q3 2024. When viewed like this, it was quite the turnaround story driven primarily by one thing: a less aggressive rate cut / higher bond yield outlook. Look at Global REITs for instance, +16.2% in Q3 (on the back of aggressive rate cut talk) and -8.9% in Q4 (outlook for fewer rate cuts and a possible resurgence in inflation). It doesn’t stop at that. Value declined (+9.7% vs -4.1% respectively. Commodities +0.7% vs -0.5% respectively – on the back of a strengthening US$). Interestingly, Growth was consistently positive at +3.55 vs +3.9% respectively. How come seeing as a rising yield environment would normally knock that for a six? This comes down to the re-election of Trump in the US and the associated “Trump Reflationary Trades” together with the Silicon Valley “alliance” and the potential boost to the Tech sector.
There was another factor at play (more in the 2025 Outlook section): tariffs. The impact of this remains a “known unknown”. It’s happening and ranges between 10% to 20% for non-Chinese goods and as much as 60% for Chinese goods. Quite what effect this will have comes down to deal-making between countries – Trump’s preferred modus operandi. 2024 has also been a year of elections. In all of them, the people have spoken and the general message from them is clear: if our pockets are hurting, we will vote you out. Nowhere was this more visible than in India where Modi’s party was dealt a surprise blow and failed to secure the outright majority pundits had expected. Instead, it came back as the largest party which inevitably means the minority coalition partner secures leverage. Speaking of elections, the chart below reviews stock market performance across major indices:
Once again, a comparison of Q3 to Q4 2024 shows it was very much a US story with the S&P500 delivering strongly both pre and post the US election (+5.9% and +2.4% respectively). Besides Japan (-4.9% vs +5.4% respectively), this was not the case elsewhere. Europe remains in political turmoil with the German coalition having collapsed and new election called for 23rd February….far earlier than had originally been scheduled.
RE: Outlook for Q1 2025 & Beyond
Market performance over the Q3 & Q4 periods sums up what we can largely expect during 2025…..it all comes down to expectations around bond yields which, in turn, are down to inflation expectations. These are the factors to watch out for – many are interlinked in that one will impact the other:
Energy prices: Overall, oil prices are looking vulnerable. Despite a recent pick up to over $73 per barrel for WTI and over $76 pb for Brent, much of this is due to optimism, perhaps overoptimism, on a China rebound. Otherwise, oil has been hovering at or below $70 pb. Momentum could lift prices further but the fundamental case for oil prices to rise higher from current levels doesn’t make sense. Normally, rising tensions in the Middle East provide the catalyst. However, with all the latest goings on between Israel/Hamas/Hezbollah/Houthis/Iran and now Syria, none of these dislodged the oil price. In fact, they fell. So now markets seem to be pinning their bets on a China recovery. OPEC has been unable to make production caps work - in fact production cuts have led to further price declines. Not only is US shale fracking readily boosting supply but extra production from the South Americas (Brazil, Venezuela, Guyana) and Central Asia (Kazakhstan) are all adding to production. Last – but not least – the shift to electric vehicles and alternative energies (nuclear, solar, wind) are ramping up and reducing oil dependence.
Tariffs: This is a big known unknown. For an approximate guide, 20% tariffs on all goods and services applied to a nation’s imports – assuming a full pass-through effect – theoretically results in a +6% rise in inflation. However, the reality is it is considerably less seeing as both exporters and importers bear some of this rise to try and soften the blow. Furthermore, the US$ continues to appreciate – and will likely appreciate even more given that the Trump administration is seen to be more business and Tech friendly. Therefore, the resulting impact on inflation would be well under +3%. In Trump’s case, the tariffs would be applied to goods only – US GDP is not reliant on exports unlike other nations and manufacturing is not a huge part either (Trump wants to change this). So, allowing for deal-making and price cutting, the inflationary is likely to be subdued. The impact on China will be felt but less than expected. China has managed to diversify its exports away from the US considerably but the potential for 60% tariffs on its exports of goods will be felt on the wider economy in the short term.
Loan Rates: In my last Quarterly, I wrote about the real reason why I thought the Fed began cutting rates so aggressively – this year’s (and next year’s) maturing corporate debt load. In it – based on studies undertaken – I suggested rate cuts totalling 1.5% to 2%. Of this, 1% has already been done. Even with the Fed having turned hawkish again in Q4 2024, it still went on to say there’s room for two more cuts totalling 0.50%. It always has the potential – and the scope – to do more if it so chooses. The reality is, amongst the G7, 10y Government bond yields seem to be settling around 3% - which is what they averaged during 2004 to 2014. The days of sub 1% are gone! The US 10y Treasury yields around 4.55%. Over the last 12 months, it ranged between 3.6% and 4.7%. Debt servicing costs matter – the days of easy and almost zero cost money are gone. Interest costs are a massive burden on the government.
The Labour Market: All the latest data – especially in the US – points to continuing strength in the labour market. The monthly non-farm payrolls, the weekly jobless data and the JOLTS data – all point to strength. Companies are fighting hard to retain staff. Wage growth is moderating but remains ahead of inflation. There is nothing on the horizon to suggest this will be upstaged any time soon.
The China Story: For now, China still exports deflation. Latest activity data came in weaker than expected despite the fact it did increase. The impending tariffs from the Trump administration-in-waiting are certainly having a choking effect on Chinese activity. The latest rise in oil prices denotes the possible optimism on President Xi’s plans to promote growth…..but we have been here before. There have been several attempts at this, all very recently and it hasn’t driven confidence. The property sector remains at the heart of the country’s malaise.
Technology & Innovation: It’s always about the earnings! For 2024, earnings growth (Source: LSEG) for the S&P 500 is estimated to be over +10% (2025: +14.3%). Profit margins are expected to be 12% (a near record vs a 10y average of 10.8%). By contrast, Tech stocks are estimated to see earnings growth of 20.1% (2025: +21.1%). For the Mag(nificent)-7, the figures are +33% for 2024 just +4% for the remaining 493 stocks in the S&P 500 (Source: FactsSet). Earnings growth for the Mag-7 is expected to slow in 2025.
Megacap Tech Earnings Growth: 2024 vs 2025 (calendar year)
Source: LSEG/CNBC
The key point here is the scale of technological adoption undertaken by non-Tech companies as well as the different sectors e.g. Generative AI is exploding with powerful impacts on BioTech and Robotics. These all require AI Chips, anywhere between 2 to 20 per item. The more sophisticated the item, the more AI Chips they need. The rate of adoption is going to be the key determinant of earnings – especially given the urgent need amongst Western economies to cut departmental spending and enhance productivity in an era where populations are ageing quickly and fewer people are available to boost the workforce.
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