Monthly House View - March 2024 - Download here

The S&P 500 – the flagship US equity index – topped 5'000 on 9 February, up more than 5% since the beginning of the year. Corporate earnings were better than expected and the economy is showing remarkable signs of strength and resilience. The market had expected job creation to slow to less than 200’000 in January, but the final figure came in at more than 350’000. Employment remains strong. This seems counterintuitive, particularly when the press is laser-focused on jobs lost because of the artificial intelligence (AI) revolution. And yet, the United States managed to create jobs, even with more than 30’000 AI-related layoffs (source: Layoffs.fyi) since the beginning of the year. Almost all sectors were hiring with the exception of mining and gas extraction. We note, for example, that chemical manufacturers hired nearly 7’000 people in January, the sector’s strongest growth since 1990.

Real growth (excluding inflation) in the United States was an annualised 3.3% in the last quarter of 2023, and inflation came down to 2.6% in December, close to the central bank’s target of 2%. This decline in inflation is somewhat deceptive, however, as it was due mostly to volatile components such as food and energy which, when removed, lift the figure to 3%. This nevertheless led the markets to expect the Federal Reserve (Fed) to cut rates sharply this year, which lends weight to the US growth and market support argument.

The United States owes its robust post-COVID growth, at least in part, to its use of credit. While US public and private debt has almost doubled in 10 years and is approaching 100 trillion dollars, companies are now facing a negative scissors effect: higher costs with the end of free money (their debt stands at more than 20 trillion dollars) and a slowdown in the upward trend in profits. 

In addition, the strength of manufacturing activity, boosted by measures to relocate strategic activities (IRA and CHIPS Act for America), is faltering and market leaders like TSMC and Intel have delayed the opening of their US plants by up to two years. The subsidies promised by the government have been slow to materialise.

On the demand side, the US consumer has been extraordinarily resilient, driven by real growth (excluding inflation) in wages, even though the additional savings accumulated post-COVID are now mostly spent. It is consumption in China that is raising questions in a depressed economic environment, where the liquidation of real estate giant Evergrande that was ordered at the end of January has added to the negative pressure.

Naturally, there are opposing forces that affect US growth, and the possible re-election of Donald Trump could be one of them. The good news is that, by being provocative now, with his talk of implementing a tariff of at least 60% on Chinese products and encouraging Russia to attack NATO member countries that have not met their military spending target, he is motivating Europeans to react and remain united.

AI is the driver that will remain resilient no matter what. According to a recent BCG survey, 89% of executives rank AI as a top tech priority for 2024. Capital expenditure expected by the market this year is at an all-time high for US tech giants, i.e. nearly 300 billion dollars for the “Magnificent 7”.

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_{Monthly House View, 22/02/2024 - Excerpt of the Editorial}