
Financial markets have changed immensely since just two months ago, when the "Trump trade" was launched. The day which followed the Trump election the consensus was that US equities will rally into eternity and European markets are doomed. Most money managers forecasted in early November that being long US/short Europe was the best trade to be placed for Trump 2.0. Back then, US small caps were seen as the strongest beneficiary of the new administration's main policies. And for most part of November this was the momentum trade to be in. Things have now changed and it is not clear whether something bigger is brewing or it is just early January "blues", because Santa abandoned the markets in December.
The Trump-trade has largely unwound as January has continued where December left off. The S&P500 lost 2% last week and is now lower than the closing level of the day of the Trump election. The Russell 2000 (small caps) has now corrected more than 10% from that enthusiastic high, in mid-November and is currently lower than the level even before the market realized that Trump will be elected, a few days ahead of the election. In the meantime, Europe has staged a rebound nobody foresaw and its main indices are now positive for the year by 1.5% on average while the US main indices are now -1%. The Implied Volatility Index (VIX) has exploded higher to 20, touching an intraday high of 28 a few days ago, a condition that is not consistent with a care-free bull market. Of course these are early stages in a rather long and interesting year ahead.
An accident waiting to happen, did happen. Bonds and equities have sold off, both from expensive levels, offering some relief to down-to-earth investors like ourselves, that the market does pay attention to valuations and most importantly the overall macro environment. As we have said before, US equities could have rallied their way into a bubble, which would have caused real trouble thereafter. Instead any correction and consolidation within 10% of the recent highs (i.e. up to the 5500 level) can be seen a rather healthy sequence within a longer-term positive trend. At the same time, we have warned that the average annual US markets' performance in the next 18-24 months will be just a small fraction of the average of the last two years. Investors must understand that a period of much lower returns lies ahead, given the current situation (high inflation, high deficits, high debt, expensive valuations), unless a bubble happens.
The bond market continued to sell-off, primarily in the US and the UK. The long-term bond yields have risen more than 40bp since Trump's election, as the market is focused, once again, on two major issues : a) inflation and b) fiscal deficits combined with high government debt. This rise in yields was flagged in late November as a potential threat to the US equity rally. Our view back then was that Trump's promised policies are inflationary and potentially damaging to the US fiscal situation, which will eventually cause the FED reaction and a bond marker revolt. Both these have happened, and the only way forward is either the economy to severely slowdown in the next few months or Trump to make several U-turns on his campaign promises. He just started the latter, with his "ending Ukraine conflict in one day" pre-election statement becoming "six months is more realistic".
The US labor market date were stronger than expected in December, at least on the surface. The monthly Non farm payrolls were published at 255k, vs expectations for 155k and the unemployment rate fell to 4.1% from 4.2%. Looking into the details and smoothing through some of the recent volatility in the noisy reports of October and November the 3-month moving average gain in nonfarm payroll employment stands at 170k, just below the 173k seen in November before today's report. The 6- month moving average is now 165k. On the positive side (for inflation) the 12-month change in Average Hourly Earnings edged down to a 3.9%, below the 4.03% published through November in last month’s release. All in all, the data solidify the view that the FED will not cut rates in the next meeting, at least.
The minutes of the last FED meeting did not reveal any new information. The main message was the one already communicated by J. Powell and his comrade, that inflation is back as a concern and the risk of an economic downturn has subsided, the exact opposite sentiment of just two months ago, in September, when they proceeded with the 50bp rate cut. It is now clear that more rate cuts will have to pass a high bar, i.e. significant worsening of the labor market and/or a quick drop of inflation to 2%, both of which conditions seem distant for now. As mentioned above and given also the labor market data, the FED is expected to pause at its next meeting at the end of this month, which will give it ample time until the next meeting in mid-March to asses the situation. As a reference the FED still expects to cut rates by 50bp this year, according to their official projections. To be clear, their official projections were for 100bp cuts just two months ago, so there is no real value of these official estimates. The market is currently discounting much less than 50bp cuts this year.
Eurozone December inflation rose by 0.2pp to 2.4% y/y (unrounded: 2.44%), matching consensus expectations. At the component level, as expected, higher energy inflation helped by the base effect, was the key driver behind the increase. Core inflation was unchanged at 2.7% y/y, also matching consensus expectations. Within core, services inflation edged up to 4% y/y, but in contrast, goods inflation was weaker than expectations with a fall to +0.5% y/y. Finally, food inflation was unchanged at 2.7% y/y , also lower than expected. All in all, the inflation data confirmed the already known trends that services' pricing remains an issue, that consumer goods have deflated and that the small rise in inflation in December was within tolerance. We expect inflation in the Eurozone to move back to perhaps below 2%, given the base-effect, all other things being equal of course.
Chart of the Week : The Q4 earnings season is about to start.

The above chart compiled by FactSet, shows the expected growth of earnings per share (EPS) per sector for the S&P500. The blue bars show the current expectations for the year-over-year growth for the last quarter of 2024 and the light grey bar shows the expectations for the same period, but at the end of September. First, we should note that the overall growth is expected at 11.9% , and if this holds it will be the highest since the same quarter of 2021. Before moving into some sector details, it is also worth mentioning that since September the S&P500's expected EPS has fallen by almost 3%, due to downgrades. At the same time, the index has moved higher by more than 2%, which means that it has become even more expensive and vulnerable to disappointment. The biggest growth is expected in Financials (almost 40% growth since the same quarter last year) while Energy companies' profits are expected to have dropped by more than 20%. Their expectations have also moved even lower than three months ago, so there is scope for positive surprise. Ten out of twelve sectors have seen their EPS growth expectations being downgraded since last quarter, which again leaves some scope for positive surprises. The sector with the biggest increase in expectations is Communications which includes the likes of Alphabet and Meta, which sets up the stage for potential negative surprises.
Disclaimer
• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.
• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.
• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.
• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.
• Sources: Chart of the Week : KSH/FactSet,
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