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Carlsquare weekly market letter: Strike among bond investors can give upside for equity market

  • As we wrote last week, the stock market has run out of steam and a pause and pullback would be good for the market. Today’s inflation figures could be the catalyst as inflation has twice come in higher than expected which the Fed has dismissed as noise. But a third time in a row must be seen as a trend, right? With higher inflation, central banks will have to wait longer than expected to cut interest rates
  • From a very long-term perspective, we see from reports and conversations that bondholders are becoming increasingly cautious about owning bonds. Returns have been lacklustre over the past couple of decades, and with ever-increasing levels of debt on sovereign balance sheets, the question is more and more about alternatives to investing in bonds. The next best alternatives are corporate bonds or equities. If this is a new trend in the making, it could improve multiples for decades and provide underlying strength to equity markets

On a cumulative basis, the bond market is much larger than the stock market

Traditionally, investment managers recommend 40-50 per cent of portfolios be in bonds if you have a large personal portfolio. And the older you are, the higher the recommended allocation to bonds. Bonds are seen as a conservative, safe investment – especially if you buy government bonds, because governments rarely go bankrupt.

But if you look at the return on bonds over the past two years, it is understandable that bondholders are becoming increasingly nervous about the long-term return on bonds. With higher inflation rates, interest rates go up, and with higher interest rates, the value of bonds goes down.

After a very long bull market for bonds, it has turned into a bear market, as can be seen in the chart above, which shows the performance of the US 20-year bond.

The bond market is the easiest way for a government to increase its debt by selling bonds on the open market. The increase in bonds is also a risk factor that needs to be considered.

US public debt is skyrocketing and is likely to continue to do so. At least under current US leadership.


Someone has to foot the bill (or at least come up with the money to pay it). China and Japan have long been investors in the US debt market, but that has come to an end. At the same time as the Fed is reducing its holdings of US debt, it is up to the private market to buy the bonds.

Not surprisingly, we are increasingly hearing that bondholders are looking for alternatives. Real estate and real estate company shares are popular, as are companies investing in infrastructure. The cash flows are seen as stable and the risks as lower, offering an alternative to bonds.

Just as we were finishing the text, BofA’s latest report has a quote from a client as its headline: Anything But Bonds (ABB)…

It goes without saying that it does not take a big difference in the attitude of bond holders to make a big difference in the equity market, as the bond market is three times the size of the equity market.

We want to keep that on our radar screen. We are already positive on the long-term outlook for equities because we don’t see any really good alternatives in the market.

Ultimately, the central banks will have to pick up the tab again, but that is a problem for the indefinite future and for tomorrow.

Next on the dock are the US inflation figures. Higher inflation would mean higher interest rates and lower bond prices.

The mother of inflation is wages and energy prices. Even with higher job numbers in the United States, wages still do not seem to be a major problem. The US is currently importing a lot of low-wage labour, which reduces the risk of inflation. Today’s CPI number in the US will be closely watched as it needs to be in line with expectations for the Fed to cut rates. If it is higher, the Fed will have to wait a little longer before taking action. But don’t forget that it’s not the numbers themselves that are important. The market’s reaction to the number is much more telling!

Energy prices remain the big headache. As the chart above shows, the price of oil is a leading factor in inflation.


Both large oil and service companies have performed well recently, as we have pointed out before. What is interesting is that the smaller energy companies have not done as well. As a group, they are stuck in an ascending triangle. …

The S&P 500 is trading in a coil in anticipation of today’s CPI numbers. A lot of energy can be released and it goes both ways depending on the outcome of the numbers…

With earnings not improving at the same pace as the stock market, valuations are trending higher again. The S&P 500 is now at the top of its P/E range, so the market is vulnerable to a correction here.

NVDA is loosing more and more pace.

Happy trading!

Q1 2024 earnings season starts on Friday 12 April

The S&P500 Q1 earnings season kicks off this week with some of the major US banks reporting on Friday 12th April (JP Morgan Chase, Citigroup and Wells Fargo). This is followed by Goldman Sachs and Charles Schwab on Monday 15th April and Bank of America and Morgan Stanley on Tuesday 16th April.

The average expected earnings growth for the S&P500 financials sector is 0.7% for Q1 2024. However, it varies widely from 37% expected earnings growth for insurance companies to negative 18% earnings growth for S&P500 banks. In between these two extremes, we find Consumer Financials, Financial Services and Capital Markets with 13%, 11% and 0% expected earnings growth in Q1 2024, respectively.

For the first quarter of 2024, the estimated annual earnings growth rate for S&P500 companies is currently 3.2%. This is significantly lower than the corresponding estimated earnings growth rate of 5.7% on 31 December 2023.

As of Friday 5 April 2024, 20 S&P 500 companies (4% of all companies) have reported their Q1 2024 results. 90% have reported positive earnings surprises and 45% have reported positive revenue surprises.


Week Ahead

Reports and event on Wednesday, 10 April: Creades, Dustin and Stolt-Nielsen.

At 8.00 CET, Statistics Sweden will publish the GDP indicator, the production value index, household consumption and industrial orders, all for February. The Bank of Canada will release an interest rate announcement. From the US, we get March CPI, February wholesale inventories, weekly oil inventories (DOE) and the minutes of the FED meeting on 20th March.

Reports on Thursday, 11 April: Constellation Brands and Fastenal.

From China we get March CPI and PPI at 3.30 CET. Opec will release its monthly oil report. From the US, we get weekly jobless claims and March PPI. An ECB rate announcement is due at 14.15 CET, followed by a press conference at 14.45 CET.

Reports on Friday, 12 April:  Atrium Ljungberg, JP Morgan Chase, Citigroup, Wells Fargo, The Progressive, BlackRock and Fast Retailing.

We start the day with China’s March Trade Balance due at 5.00 CET and Japan’s February Industrial Production at 6.30 CET. This is followed by Sweden’s and Germany’s March CPI and the UK’s February GDP and Trade Balance at 8.00 CET. 45 minutes to an hour later we get France’s and Spain’s March CPI. At 10:00 CET, the IEA presents its monthly report on oil. The United States will release import prices for March and the Michigan index for April.

Reports on Monday, 15 April:  Goldman Sachs, Charles Schwab and HDFC Bank Limited.

Japan’s Machinery Orders for February will be presented at 1.50 CET. Eurozone industrial production for February is due at 11.00 CET. From the US, we get the Empire Manufacturing Index for April, Retail Sales for March, Inventories of Unsold Goods for February and the NAHB Housing Market Index for April.

Reports on Tuesday, 16 April: Ericsson, HMS Networks, TopDanmark, Bank of America, Johnson & Johnson, Morgan Stanley and United Health Group.

China releases Q1 GDP as well as unemployment, house prices, industrial production, retail trade and investment for March at 4.00 CET. UK February Unemployment and Germany March Wholesale Prices are due at 8.00 CET. Italy’s March CPI follows at 10.00 CET. One hour later, the Eurozone February Trade Balance and Germany’s April ZEW Index are due. Canada will release its March CPI figures. From the US, March housing starts and industrial production, weekly Redbook retail sales and weekly oil inventories (API) will be released.


The information in this presentation is based on what the publisher, Carlsquare, believes to be reliable sources. However, we cannot guarantee its content. Nothing in the presentation should be construed as a recommendation or solicitation to invest in any financial instrument, option, or the like. Opinions and conclusions expressed in the presentation are for the recipient’s use only. The contents may not be copied, reproduced, quoted, or distributed to anyone else. Carlsquare shall not be liable for any loss arising from any decision taken based on the information contained in this presentation. Past performance should not be taken as an indication of future results. Changes in foreign exchange rates may affect the value, price or income of an investment made abroad or in a foreign currency.

The analysis is not directed at U.S. Persons (as that term is defined in Regulation S under the United States Securities Act and interpreted in the United States Investment Companies Act of 1940), nor may it be distributed to such persons. The analysis is not intended for natural or legal persons where the distribution of the analysis to such persons would involve or entail a risk of violation of Swedish or foreign laws or regulations.

Carlsquare weekly market letter: Strike among bond investors can give upside for equity market