Chips with everything

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After a shaky start to the year, Wall Street has managed to regain its poise, dragging itself kicking and screaming to a new record high, possibly signaling the end of a 2-year bear market. The S&P 500 is now up 1% on the year, helped by the two-year US treasury, the most sensitive to interest rate changes, recovering losses from earlier in the year and a resurgence of AI-related optimism. Chip stocks are having a good week as the Taiwan Semi provided a positive outlook for the sector in the coming year. AI will drive a new wave of demand for mobile phones and computers.

Flicking through the papers, the journalists and economists are focused on the same topics that vex every portfolio manager. Despite contracting money supply and a yield curve that remains inverted, if less so than it was, most of the money seems to continue to back a soft landing. The expectation that the Fed will cut rates this year by five times remains, but the timing of March being the first date is now being questioned. The latest Michigan consumer survey on Friday suggests a resilient US spender. Stocks in the US, admittedly driven by possibly exaggerated expectations for growth from the tech sector, are not cheap. Selling US stocks or recommending to sell US stocks based on valuation has been a graveyard for quite a few managers and strategists over the past few years.

 In contrast, those indexes across the rest of the globe, at worst, valuations look in line with history. China’s economy remains a topic of much debate. 300% debt to GDP may hinder how much the government can add a helping hand, but it must be agreed that Chinese equity valuations appear to be discounting a lot. Buy the CSI 300 and sell the S&P 500. Now, there’s a brave man. Those who believe where small-cap indexes lead, larger ones follow would also be cautious of the continuation of the rally in the S&P 500. For much of last year, there was a strong correlation between the dollar and the S&P 500. Stocks rose as the dollar fell; year to date, the US dollar has gained almost 2%. All this is trying to prove is that, at present, one can easily make a very positive case for stocks, but it’s also easy to see that others are more risk-averse. We have not even discussed the possible implications of all the current geopolitical uncertainty for the global economy.

This week ahead, we will see a mass of leading global brands reporting earnings, including Procter and Gamble, Tesla, American Express, ASML, Johnson and Johnson, Ericsson, and Philip Morris, to name but a few. There is also plenty on the macro front to keep money managers busy; Central Bankers meet in Europe, Canada, and Japan. Investors still believe that central banks will provide a positive backdrop for stocks in the year ahead. The first set of flash PMIs for the year ahead will be released in the middle of the week. US Q4 GDP is released later this week, along with various inflation updates in parts of the world. The core PCE is forecast to pick up very modestly year over year to 2.7%.