Rudi’s View: Rate Cuts, Growth & Small Caps

Rudi's View | 9:58 AM

Part One of this week's Weekly Insights was published yesterday: https://fnarena.com/index.php/2024/07/17/rudis-view-corporate-earnings-the-best-indicator/

Part Two contains updates on strategies, model portfolios, key picks, best buys and conviction calls.

Research-based views and strategy updates pass by just about every day at FNArena. This week I have cherry-picked quotes to illuminate and inform about trends in views and forecasts that are underpinning positive sentiment in share markets in July.

Model Portfolios and Best Buy Ideas are, as per usual, further below.

Rate Cuts, Growth & Small Caps

By Rudi Filapek-Vandyck, Editor

"In early April we upgraded our year-end 2024 ASX200 market target on signs of relief from investors that economies were on a more balanced path. Since then sentiment and momentum have driven stocks higher, with the ASX200 breaking through our 8000 market target on Monday.

"Although we remain positive on equities, we keep our year-end target unchanged at 8000 as we await upcoming company results through August. Bull market yes, but no clear signs of market euphoria. Crossing a market milestone allows us to compare and contrast with previous experiences.

"At 8000, the ASX200 sits on a richer than usual valuation multiple, whilst the current dividend yield still seems comparable to history. Bolstering the support for equities is the fact that although both cash and bond yields have risen over the last four years, they don't offer the attractive pull they once did have against stocks"

(...)

"The cyclical adjusted PE, or CAPE', allows us to gauge if standard PE ratios are being restrained by an over inflated earnings base. Currently we do not see any such signs of an 'earnings bubble', with share prices still being relatively commensurate with the preceding trends seen in earnings. ROE's also indicate that companies have not been 'overearning'."

[UBS]

****

"The door is opening for the Fed to begin cutting rates soon, which we expect to start in September (25bp).

"Second quarter inflation data indicate disinflation is in place. The labour market has rebalanced, and hiring is slowing.

"Our models indicate that GDP growth may slow to below its potential rate. This adds to our conviction that excess demand has subsided, and the broader economic landscape supports a sustained return to price stability.

"Monetary policy looks too tight. Our augmented Taylor Rule gauge of neutral policy rates signals fed funds should be in a range of 3.75-4.0%. We forecast fed funds to be in a range of 3.25-3.50% by Q3 2025."

[ANZ Bank]

****

"Markets are almost fully priced for a cut at the September 17-18 FOMC meeting, which remains our baseline forecast. But we see a solid rationale for cutting as early as the July 30-31 meeting.

"First, if the case for a cut is clear, why wait another seven weeks before delivering it?

"Second, monthly inflation is volatile and there is always a risk of a temporary reacceleration, which could make a September cut awkward to explain. Starting in July would sidestep that risk.

"Third, the FOMC has an undeniable (if never acknowledged) incentive to avoid initiating cuts in the last two months of a presidential election campaign. This doesn't mean the committee couldn't cut in September, but it does mean that July would be preferable."

[Goldman Sachs]