Last year transformed into an expectations year, as in April global equities had already started showing signs of fatigue. Maybe few remember that the Euro Stoxx 50 peaked at the end of March and spent most of the rest of the year trying unsuccessfully to recapture these levels. In the US, Artificial Intelligence became the dominant theme and stopped the spring correction, giving way to a relentless rally in Tech-related companies. The Trump election pushed equities further up, before reality kicked in during the last month of the year. In China, the local index had a horrible first nine months, but again the stimulative measures by the monetary and fiscal authorities caused the index to finish the year with a 15% gain, most of which came in just a few days at the end of September. Expectations are now for even more forceful stimulus this year, something that of course has yet to be seen.
2025 will be the year of proof for the demanding valuations in parts of the equity markets. First and foremost, investors will demand real signs that the explosive spending on AI equipment and infrastucture can be monetized into real revenues and profits. Otherwise it will be seen as another waste of capital, similar to 2022 when the pandemic-related demand quickly faded. Valuations of Technology firms will have to move lower, in that case. This is crucial also for electrification beneficiaries (the likes of ABB, Schneider Electric etc) which have riden the wave of relentless spending on data centers and their valuations have risen to much higher levels than the previous years' averages. Any sign of spending-fatigue will hurt them too. Defense companies have also a lot to prove and a possible Ukraine-Russia deal will definitely create volatility as the market will question the currently discounted high rate of growth of this sector. Overcrowded positions in the above mentioned sectors is a major headwind, as December proved.
The bond market will also need proof that inflation will start falling again, especially in the US. "Fortunately" the market has moved lower and valuations have significantly improved, as fewer rate cuts are now expected in the US, so a negative scenario has already started to be discounted. Our view is that the inflation situation in the Eurozone looks better, as growth remains subdued and the base-effect is a tailwind for CPI to move sustainably lower than the 2% target in the first six months of 2025. The US situation appears to be more complex, as growth seems to be re-accelerating and the labor market remains rather robust. Proof that inflation can reassume its downward path will be positive for the fixed income market and a tailwind for equities, but the opposite will be detrimental.
Finally, we will experience how the Trump administration will manage to implement all the promises made during the campaign, without sparking inflation, blowing up the already high deficits and/or causing a revolt. The equity rally on the first days right after the election was based on expectations for deregulation and America-first policies, which will ignite the "animal spirits" and the economy will re-accelerate. We now have to see the proof of that. The Trump-trade has now lost some of its shine and December proved to be a profit-taking month, but valuations are still demanding. Equally important is how easy is for the US society to overcome the current extreme polarization, which Trump and Musk make only worse, as well as the increasing income and wealth inequality. The tragic event of New Orleans as well as the suicide in a Tesla, in front of a Trump building on the first day of the new year could be bad omens.
The first week of trading was volatile but with light volumes in equity markets, so no major conclusions should be made. The main direction remained the same, with Technology outperforming and helping the S&P500 gain 1%, and Eurozone equities starting the year on a negative note . The UK (+0.6%) and Swiss (+0.2%) stocks managed to eke out small gains. China's markets sold-off , with the local index falling 4% and Hang Seng down by 1.5%. In terms of sectors, Energy was strong on both sides of the Atlantic, with European names rallying almost 5% for the week. Utilities (2%) were also a bright spot, as well as Technology in the US (+1.4%).
Bonds continued to be weak and yields moved further higher. The US 10-year yield is back at 4.60% and the German equivalent broke above 2.40%, for the first time since late October, as Spain and Portugal posted negative surprises for December inflation. The EUR corporate bonds are back in the zone which we have highlighted as buying territory and especially the highest quality segment of the market. The risky, high yield market has corrected since mid-December with spreads in the US moving higher by more than 30bp and confirming our view that this segment appeared very expensive back then. Still some caution is warranted in establishing new positions.
The Eurozone December inflation data are due on Tuesday. As already mentioned inflation in Spain was announced at 2.8% vs expectations 2.4% and Portugal's rose to 3.1% vs exprectations for a rise to 2.8%. Today we get Germany's data ahead of tomorrow's important Eurozone composite numbers. Expectations are for headline CPI to have risen to 2.4% from 2.2% and core CPI to have remained stable at 2.7%. But the probability of a negative surprise has risen, unless the German and French data ahead of the Eurozone provide some relief.
US labor market data will be released on Friday. The December monthly non-farm payrolls are expected to rise by 155k, a much smaller number compared to the jump by 227k in November and the unemployment rate is expected to have stayed at 4.2%. Given the low expectations, the US bond market will struggle to stabilize as the technicals point to higher yields ahead. On the contrary, if the number misses these low expectations, there will be a counter-trend rally.
Chart of the Week : No Santa rally this year.
December was a rather brutal month for investors , as there was virtually no place to hide. All asset classes finished lower, except for Emerging Markets equities and oil prices. The latter gave a boost to Energy stocks , which have been lagging for two years in a row, but have started the year with top performance. The S&P500 managed to post a 23% return for the whole year, helped primarily by the performance of the Tech-related companies. The December correction brought the S&P500 below the level reached after the Trump election day, causing the short-term traders losing money on the Trump-trade, for now. In Europe, the 2024 equity returns were lackluster, with Stoxx 600 up a mere 6%, France having a negative year (-2%) and Swiss stocks posting just 4% of gains. The region's star was the German DAX index, which rose by almost 19%, boosted by the rally in shares of SAP, of insurance companies and banks, as well as defense companies.
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,
Comments