Federal Reserve

Are equities in a “good place”?

Equities 5 minutes to read
Peter Garnry

Chief Investment Strategist

Summary:  The Fed delivered a hawkish rate cut but equities nevertheless made new highs fueled by better than expected earnings from both Facebook and Apple after the US market close. While Powell seems to believe the US economy is in a "good place" equity valuations in the US are getting stretched and on some metrics resembling what we saw in 2000. Yesterday's ADP employment change figure for October was bad news and the 6-month average is now the weakest since 2010. The next three months are going to be critical for equity investors.


FOMC delivered a hawkish rate cut last night as anything else would be fueling exuberance in equities. The guidance provided in the press release and subsequent press conference changed the market’s pricing of a no change FOMC meeting in December from around 70% to almost 80% suggesting that the Fed is simply aligning itself with the market. The market reaction was equities higher with S&P 500 reaching new all-time highs and the USD headed lower. For more in-depth analysis of the FOMC rate decision we recommend reading our FX Update from this morning. During the press conference Powell said that the US economy was in a “good place” due to Fed policy fitting the narrative of the hawkish cut. But is the economy and equities really in a “good place”?

Source: Saxo Bank

As we have highlighted repeatedly the past 18 months the global economy is slowing down, the credit transmission in China is broken, equity valuations are clearly driven by substitution effects rather than actual profit growth and the strong USD means that financial conditions are tight in emerging market countries. In our view the Fed is not getting ahead of the curve by aligning itself with the equity market and Fed Funds futures as these two markets are not in line with the current trajectory in the economy. Normally, we show S&P 500 valuation using our standard model of nine different valuation metrics, but today we feel it necessary to show the current ratio of EV/EVITDA in a historical context. As the chart shows, equity valuations are flirting with dot-com bubble levels. Not an ideal starting point for good long-term returns. One must begin questioning whether the Fed’s policy is now starting a bubble in US equities never seen before.

Yesterday’s most interesting data point except from the FOMC rate decision was the ADP employment change figure for October at 125K beating estimates of 110K, but September’s figure was revised down to 93K from 135K. On a net basis the employment situation is worse during the Sep-Oct period than expected. The 6-month average declined to 112K which is now the lowest level since September 2010 and the loss of momentum in the US labour market in 2019 is eclipsing the slowdown in 2011. The US economy is entering a critical phase as the slowdown in the labour market could begin changing the narrative among the consumer. These inflection points where the narrative changes are often sudden and makes it difficult for the central bank to offset.

The last couple of days rumours of a merger between Fiat Chrysler and PSA (parent company of Peugeot) came true this morning with the two carmakers announcing a board agreement to combine the two groups. The combined entity is expected to get €3.7bn in cost synergies and the combined group will complement each other globally in terms of geography and brands. Fiat Chrysler shareholders will receive a special dividend of €5.5bn as part of the deal. The two groups will each own 50% of the new combined entity. As competition is heating up in the global car industry with large new Chinese carmakers and an expensive transition to electric vehicles the merger might turn out to be the right thing.

Adding to the positive sentiment in US equities pushing the key indices into new all-time highs was positive reactions to the Facebook and Apple earnings releases. Facebook delivered strong revenue growth of 29% y/y and EPS growth of 21% y/y both beating expectations. Simultaneously with Facebook reporting earnings Twitter announced that they are banning political ads globally on their platform putting pressure on Facebook to make similar move or at least tighten the control more. The potential canary in the coalmine for investors in Facebook was the EBITDA margin declining to 48.7% the lowest level since Q1 2016.

Apple’s earnings were a story of revenue and EPS beating estimates but also a story of iPhone revenue down 9% y/y and iMac revenue down 5% y/y but importantly offset by Services (app store sales etc.) and Wearables etc. The most positive thing in the earnings release was the flat revenue growth in the Greater China segment which indicates that Chinese consumers are not completely abandoning Apple’s products.

Quarterly Outlook 2024 Q4

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Head of FX Strategy

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Head of FX Strategy

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.