Stocks stuck in the mud


Marko Kolanovic at JPM remains bearish.

Equities are up YTD on multiple expansion while real rates and cost of capital are moving deeper into restrictive territory. History suggests this relationship is becoming increasingly unsustainable, with the S&P 500 multiple over-valued by 3-4x vs. real rates, posing risk to valuations, especially since earnings expectations already face a high hurdle for 2024. The Growth-Policytradeoff is still challenging for Eurozone, EPS revisions are set to turn sharply negative, and Euro equities are trading better than the macro outturns would suggest, though valuations are beginning to look cheap. The bond sell-off has taken yields back toward cycle highs but given the risk of hawkish surprises from the Fed and BoJ as well as the risk of a government shutdown, we stay neutral duration and keep 10s/30s steepeners. The ECB delivered likely its final hike in the cycle, giving investors the green light to enter end-of-cycle carry themes, and we stay long 5YGermany and 2Yx1Y €STR swaps. US credit metrics continue to deteriorate, with weakening EBITDA margins a logical result of the current inflation dynamic where wage increases (costs) are outpacing goods inflation (revenue). We use the rally in Euro credit to set hedges. We remain bullish on USD vs. growth/yield challenged currencies (EUR, JPY, CNH) and keep selective exposure to carry. Our robust demand outlook for oil results in an estimated 3.3mbd deficit in 4Q23.

Valuations are high. But not quite as high as meets the eye. The Market Ear has more.


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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.