Goldman Sees Risk of 10% Drop in Euro If Trump Wins US Election Bank keeps $1.10 year-end forecast, sees parity as possibility

Goldman Sachs Group Inc. said the euro could drop as much as 10% versus the dollar if Donald Trump and the Republicans win next month’s US elections and enact high global tariffs and generous domestic tax cuts.

The bank already believes that an outperforming US economy and relatively high rates will keep the dollar strong, and it sees a risk that strength in the greenback could last even longer than its forecasts if next month’s vote results in “much higher” tariffs. It also said the yuan could fall 12% under that scenario.

Investors have been ploughing into the dollar ahead of the presidential vote on Nov. 5, emboldened by solid US earnings and growing speculation that the Federal Reserve will be less aggressive in cutting interest rates. While Goldman’s base case is still for the euro and the yuan to rebound from current levels by the end of the year, it says a slump in both currencies can’t be ruled out depending on the outcome of the vote. (…)

While the race remains close, strategists see a Trump victory and Republican sweep of Congress adding to its rally, as Trump has threatened to slap tariffs on China, Mexico and other countries, which would likely crank up inflation and keep US rates high. (…)

Cahill said that the euro could depreciate “closer to 10%” if Washington slaps 20% tariffs on China and 10% levies on other countries. That scenario would push the euro down below parity to around 0.97, a level last seen in late 2022. But for now, Goldman is sticking with its forecast for the euro to end the year at $1.10, and rise to $1.15 in 12 months’ time.

Various tariffs on Chinese products could send the yuan to 7.4 per dollar, its weakest according to data compiled by Bloomberg going back to 2010. An analysis of the former president’s trade policy between 2018 and 2019 shows the Chinese currency depreciated 0.7% versus the dollar for each $10 billion in implied tariff revenue, the bank said.

In a scenario under which Trump imposes 60% blanket tariffs on Chinese imports, the yuan could drop to 8 per dollar, he added. (…)

U.S. Economy Again Leads the World, IMF Says International Monetary Fund upgrades U.S. growth outlook as strong investment boosts productivity

(…) In what has become something of a trend, the IMF upgraded the outlook for both U.S. and global growth, though more for the former.

The IMF projects U.S. gross domestic product to expand 2.5% in the fourth quarter from a year earlier—half a percentage point higher than a July forecast, which itself was an upgrade from a January estimate. U.S. output rose 3.2% in 2023.

That would be the fastest among the Group of Seven major advanced economies.

Global output is now projected to grow 3.3% this year, a smidgen above the prior estimate. Focusing just on wealthy nations, the U.S. is increasingly ahead. Advanced economies as a whole are expected to expand 1.9% this year after growing 1.7% last year.

For 2025, the IMF projects the U.S. to grow 1.9%, versus 1.7% for all advanced economies and 3.1% for the global economy.

China, the world’s second-largest economy, is expected to post 4.5% growth this year—a slight downgrade from a prior estimate—and 4.7% in 2025, after expanding 5.4% last year. The euro area’s economy is expected to grow 1.2% this year and 1.3% next year, after expanding 0.2% last year.

The IMF attributed the latest boost in the U.S. outlook to higher nonresidential investment and stronger consumer spending, which is being supported by rising real, or inflation-adjusted, wages. Real wages tend to rise when productivity grows, because companies that become more efficient can pay their workers more.

Investor money has flooded the U.S. in recent years, while big legislative packages funded green energy and infrastructure. Meanwhile, abundant domestic supplies largely insulated U.S. companies from energy shortages and price shocks.

Economists say that has all led to a surge in investment in the U.S., which boosts productivity—or output per hour worked. Productivity is the main ingredient for higher long-term growth and living standards. (…)

According to the IMF, U.S. gross fixed capital formation—a broad measure of investment—will rise 4.5% this year from 2023, more than triple the rate for all advanced economies. From 2016-2025, the IMF estimates U.S. investment will have grown an average 3.3% a year, versus 2.3% for all advanced economies.

By comparison, investment spending is projected to fall 2.7% this year in Germany, previously the juggernaut of Europe, after falling 1.2% last year.

This is a big shift. In the prior decade, from 2006-2015, U.S. investment spending grew an average 1.2% a year, roughly in line with the advanced-economy average. (…)

The abundance of energy supplies helped to keep a lid on prices in the U.S. after Russia’s invasion of Ukraine, while other countries, particularly those in Europe that relied heavily on Russia, have been hit hard by high energy prices. European Union companies are still paying two to three times more for electricity than U.S. firms, and four to five times more for natural gas, according to a September report from the European Commission. (…)

The IMF said in a September blog post that productivity gains by big U.S. companies are a primary reason why the U.S. and Europe have diverged in recent years.  (…)

Lost Decade Ahead For Stocks With Only 3% Annual Returns? (Ed Yardeni)

We’ve been asked to comment on yesterday’s grim forecast by economists at Goldman Sachs that the S&P 500 will produce annualized returns of only 3% (before accounting for inflation) over the next 10 years. They reckon that the range of possible outcomes includes -1% at the low end and +7% nominal returns at the high end.

In our opinion, even Goldman’s optimistic scenario might not be optimistic enough. That’s because we believe that the US economy is in a “Roaring 2020s” productivity growth boom with real GDP currently rising 3.0% y/y and inflation moderating to 2.0%. If the productivity growth boom continues through the end of the decade and into the 2030s, as we expect, the S&P 500’s average annual return should at least match the 6%-7% achieved since the early 1990s. It should be more like 11% including reinvested dividends.

It’s hard to imagine that the total return of the S&P 500 would be only 3% in the future given the returns just from the compounding of reinvested dividends.

Let’s dig into some of the points made by Goldman:

(1) Earnings growth. S&P 500 earnings per share has grown roughly 6.5% per year for nearly a century. Assuming 6% growth over the coming decade (and removing dividends from the equation), valuations would need to be cut in half to produce just 3% annual returns.

(2) Valuation. Much of Goldman’s analysis is a story of high valuations. Conventional wisdom holds that higher starting valuations lead to lower future returns. With the Buffett Ratio (i.e., forward P/S) at a record high 2.9, and the S&P 500 forward P/E elevated at 22.0 times, we agree that valuations are stretched by historical standards.

(3) Profit margin. The forward P/E is relatively low compared to the forward P/S because the S&P 500 forward profit margin has been rising into record high territory and should continue to do so in our Roaring 2020s scenario.

(4) Inflation hedge. Goldman’s forecast does not consider that stocks are historically the best inflation hedge, as companies have embedded pricing power. Meanwhile, bonds suffer as interest rates rise to combat higher inflation.

(5) Market concentration. One of the biggest “worries” in Goldman’s analysis is that the market is highly concentrated. But while the Information Technology and Communication Services sectors are now about 40% of the overall S&P 500, around the same as the peak of the dotcom bubble, these are much more fundamentally sound companies.

These two sectors account for more than a third of the S&P 500’s forward earnings today versus less than a quarter in 2000. We also believe that all companies can be thought of as technology companies. Technology isn’t just a sector in the stock market, but an increasingly important source of higher productivity growth, lower unit labor costs inflation, and higher profit margins for all companies.

(6) Bottom line. In our view, a looming lost decade for US stocks is unlikely if earnings and dividends continue to grow at solid paces boosted by higher profit margins thanks to better technology-led productivity growth. The Roaring 2020s might lead to the Roaring 2030s.

• The Front Cover Curse

(…) The problem is that the latest issue of The Economist has a front cover story titled, “THE ENVY OF THE WORLD: America’s economy is bigger and better than ever.” The editors could have also titled the story, “US Hard Landing Forecast: Rest In Peace.” Front cover stories like this one have often been contrary indicators.

In 2016, Gregory Marks and Brent Donnelly, analysts at Citibank, looked at every cover story from The Economist going back to 1998, selecting those stories that covered “an emotional or hyperbolic portrayal of an asset class or market-related theme.” They selected 44 cover stories that had either an optimistic or a pessimistic point. They found that impactful covers with a strong visual bias proved after one year to be contrarian 68% of the time. That’s high enough to suggest that market watchers should keep the front-cover curse on their radar.

So be bullish, but stay alert. We will continue to help you do so.

Missing: Business Weeks’s front page.

The insider indicator

(…) While business leaders were busy last week offering reassuring earnings guidance, underneath the rosy outlook was a different trend: They were selling stock.

A gauge of insider sentiment, one that tallies the number of sellers versus buyers, is poised to hit the highest monthly reading in more than three years, data compiled by the Washington Service show.

The figures chime with various high-profile sales that have made headlines recently, including Warren Buffett’s unloading of Apple and Bank of America stock, and retreats by Nvidia insiders, including CEO Jensen Huang.

Granted, some of the exits no doubt have nothing to do with the business outlook, driven instead by the need for cash to buy a house or pay for kids’ tuition. And the stock rally has been mostly invulnerable for months amid Federal Reserve interest rate cuts and generally good tidings on the economy and earnings.

Still, the last time the insider indicator shot up, in July, it was a precursor to market pain, with the S&P 500 subsequently falling 8%.

With equities up nine of the last 10 weeks and benchmarks flirting with valuations rarely seen since the dot-com era, bulls may want to consider whether the people in charge know something they don’t.

The INK U.S. Sentiment Indicator represents companies with buy only transactions divided by companies with sell only transactions:

There is little change in overall US insider sentiment as we head into Q3 earnings season and the November 5th elections. There remain roughly four stocks with key insider selling for every one stock with key insider buying over the past 60 days. That depressed level signals broad market overvaluation, but absolute dollar amounts of insider selling remain within normal ranges.

As such, we would characterize the insider behaviour as cautious, seeking only to purchase stock in the open market when distinct opportunities arise.

Insider sales can be tricky. Better to concentrate on buys:

According to SentimenTrader’s Jason Goepfert, the number of insiders buying shares in their companies has recently fallen to levels last seen in September 2021. While insider buying isn’t an exact science, it has in the past been a reliable guide as to whether stocks are looking cheap or expensive.

Corporate executives among S&P 500 firms have some of the least open market purchases in 13 years.

Helter-Skelter in Bonds as Markets Doubt Fed Cuts

(…) In the wake of the Federal Reserve’s decision last month to make a jumbo cut of 50 basis points to the fed funds rate, the 10-year yield dropped below 3.6%. It’s now above its 200-day moving average, at 4.19%. The helter-skelter ride continues.

Why the change of direction? Chiefly, there is a reassessment of the Fed’s likely next move. In the wake of the jumbo cut, the fed funds futures priced in further cuts of 100 basis points by January’s meeting. That meant certainty that there would be at least one more big cut. The surprisingly strong employment data for September reined that in drastically. Since then, the expected cuts have continued to whittle away, and now the market thinks that there will most likely be only 50 basis points of cuts over the next three meetings. From pricing a certain jumbo cut, they are now positioning for a likelihood that there will be at least one meeting when the Fed stands pat. (…)

But it’s not just about the Fed. As much discussed, betting markets have shifted strongly toward predicting a victory for Donald Trump. In the last few months, it’s striking that the 10-year yield has traced the Trump odds according to Polymarket — an offshore market that may be over-influenced by a few large bettors, but which seems to be driving opinion on Wall Street. The following chart is on two scales, but still captures the way the bond market has evidently moved in response to the campaign:

Tax cuts, as promised by Trump, would tend to be expansionary and prompt higher rates from the Fed. Also, as former New York Fed President Bill Dudley explains for Bloomberg Opinion, “across-the-board higher tariffs would both raise inflation and hurt growth” — which would entail higher rates. (…)

That said, his victory in 2016, and the tax cuts and tariffs that followed in the next two years, spurred a big rise in bond yields while stocks massively beat Treasuries. It’s no surprise that people are positioning for this again. (…)

There are important differences. The PredictIt prediction market put Trump’s chance of victory at 22% on election eve in 2016; the same market now puts him at 58% (while others rate him higher). So whatever happens in the next two weeks, we can assume that a Trump victory wouldn’t provoke quite so big a reaction, because it wouldn’t be such a big surprise. (…)

• No Landing Continues

With the Atlanta Fed GDP estimate for the third quarter currently at 3.4%, the bottom line is that the expansion continues/

Why is the incoming data so strong? Because the list of tailwinds to the economy keeps growing:

1) A dovish Fed

2) High stock prices, high home prices, and tight credit spreads

3) Public and private financing markets are wide open

4) Continued support to growth from the CHIPS Act, the IRA, the Infrastructure Act, and defense spending

5) Low debt-servicing costs for consumers with locked-in low interest rates

6) Low debt-servicing costs for firms with locked-in low interest rates

7) Geopolitical risks easing

8) US election uncertainty will soon be behind us

9) Continued strong spending on AI, data centers, and energy transition

10) Signs of a rebound in construction order books after the September Fed cut

These 10 tailwinds are increasing the likelihood that the Fed will have to reverse course at its November meeting.

In short, the no landing continues.

Housing remains weak:

New Car Sales Fall in Europe On Weakened Demand September saw a 6.1% on-year drop in the bloc’s registrations, reflecting sales

EU registrations came to around 809,163 for the month.

Stellantis, the multinational company behind European brands like Peugeot, Citroen and Fiat, posted a 27% drop-off in registrations compared with last year. The Jeep and Ram maker was hampered in the third quarter by excess inventory in the U.S., while delays to new model launches also hurt shipments.

Registrations for Volkswagen, Europe’s largest carmaker, rose 0.3%, ACEA said. German luxury brand BMW rose 7.6%, whereas Mercedes-Benz fell 7%. France’s Renault saw new-car registrations fall 1.5%.

Battery-electric vehicle and hybrid-electric cars registrations rose 9.8% and 12.5%, respectively, the industry group said. Sales of conventional gas-burning cars and plug-in hybrids both declined.

• China EV Exports to European Union Soar Ahead of Incoming Levies EVs shipped to the bloc second highest on record last month

Firms from Asia’s biggest economy shipped 60,517 EVs to the 27 nations in the European trade bloc last month, up 61% from last year, according to customs data. The previous peak of 67,455 vehicles was in October 2023, when the European Commission announced that it was launching an anti-subsidy investigation into China-made EVs. (…)

BYD Co. plans to set up production in Hungary and Turkey, and other manufacturers including Xpeng Inc. and Zhejiang Geely Holding Group Co.’s premium EV brand Zeekr say they’re considering localizing production.

Decade of Big S&P 500 Gains Is Over, Goldman Strategists Say Expect annualized nominal return of 3% over coming 10 years

That compares with 13% in the last decade, and a long-term average of 11%.

They also see a roughly 72% chance that the benchmark index will trail Treasury bonds, and a 33% likelihood they’ll lag inflation through 2034. (…)

Even if the rally were to remain concentrated, the S&P 500 would post below-average returns of about 7%, they said. (…)

Callum Thomas has these interesting charts, arguing that “over the long-run it’s actually more normal for the equal-weighted index to outperform the cap-weighted index. And as of right now the equal/cap weight relative performance line is very stretched to the downside vs trend and has bounced off the 09 low point.”

Source:  GS via @MikeZaccardi

3Fourteen Research’s view is going the opposite way:

Our longstanding (and consensus) opinion has been that the S&P 500 was overvalued based on traditional metrics. After months of research and pushing ourselves to see past potential blind spots, we updated those views last week. Our conclusion: The S&P 500 is less overvalued than suggested by traditional metrics.

When you consider quality metrics, margin sustainability and the interaction between margins/multiples across different businesses, today’s S&P 500 appears fairly valued. If analysts are correct about forward earnings, then there is much more upside left in the current bull market.

They provide this video (the valuation discussion starts around the 42 minute mark.): Warren & Fernando on The Compound and Friends

Russia Hosts BRICS Leaders, Signaling Putin Is Far From Isolated Kremlin expects more than 30 countries to attend Kazan summit

Leaders of 32 countries, as well as top officials of regional organizations and United Nations Secretary-General Antonio Guterres, will attend the three-day summit starting Tuesday in Kazan, Kremlin foreign policy aide Yuri Ushakov told reporters.

Chinese President Xi Jinping, Indian Prime Minister Narendra Modi, and South African President Cyril Ramaphosa are due to join Putin alongside leaders of the new BRICS members, Iran, Egypt, the United Arab Emirates and Ethiopia. Putin plans bilateral meetings with many of them, as well as with guests such as Turkish President Recep Tayyip Erdogan.

Brazilian President Luiz Inacio Lula da Silva on Sunday canceled his plans to attend the summit after suffering a head injury in an accident at his home. Officials said he’ll participate by video link. (…)

While BRICS favors greater use of national currencies in bilateral trade, members including India reject attempts to promote China’s yuan as an alternative reserve currency.

Russia has produced a summit report outlining possible changes to cross-border payments among BRICS countries aimed at circumventing the global financial system, though it acknowledges the proposals are mainly to promote discussion. They include developing a network of commercial lenders to conduct transactions in local currencies as well as establishing direct links between central banks. (…)

Russia wants to push for a de-dollarized payment system at the summit, which China regards as too ambitious, said Wang Yiwei, director of Renmin University’s Center for European Studies in Beijing.

The meeting is the first since BRICS agreed to extend membership to six additional nations at last year’s summit in South Africa. But Argentina pulled out under its new President Javier Milei and Saudi Arabia has remained non-committal.

Nations ranging from Malaysia and Thailand to Nicaragua and NATO-member Turkey are eager to join BRICS, though there’s unlikely to be an agreement on enlargement at the Russia summit.

India is against further expansion for now and supports a category of “BRICS partner countries” without voting rights because it wants to steer the group away from becoming an anti-US body dominated by China and Russia, Indian officials said on condition of anonymity because the issue is sensitive.

Brazil and South Africa support India’s view, said officials in the two countries. Any bid to dilute South Africa’s influence by inviting Nigeria or Morocco into BRICS will be resisted, said the South African officials.

The UAE completely rejects any attempt to present BRICS membership as a sign that the Global South is in opposition to the West, according to a person familiar with the matter, asking not to be identified discussing internal policy. The Gulf state has very good relations with countries in the West including the US, according to another official. (…)

BRICS’ clout is growing. Its nine members account for 26% of the world economy and 45% of the world’s population versus the G-7’s 44% of global gross domestic product and 10% of its inhabitants. (…)

The fact so many countries want to join BRICS indicates growing demand for international ties independent of the West, said Fyodor Lukyanov, head of the Council on Foreign and Defense Policy, a think tank that advises the Kremlin.

“For now, everyone just wants to see what it can gain from this,” he said.

Crises at Boeing and Intel Are a National Emergency The two companies once set the standard for world class engineering and manufacturing. Their troubles weaken America.

(…) The U.S. is in a geopolitical contest with China defined not just by military power but economic and technological prowess. Leaders from both U.S. political parties say they are on the case, pushing for tariffs and subsidies. (…)

The U.S. still designs the world’s most innovative products, but is losing the knack for making them.

At the end of 1999, four of the 10 most valuable U.S. companies were manufacturers. Today, none are. The lone rising star: Tesla, which ranked 11th. (…)

Neither fell prey to cheap foreign competition, but to their own mistakes. Their culture evolved to prioritize financial performance over engineering excellence, which also brought down another manufacturing icon, General Electric. (…)

Since their problems are of their own making, it is tempting to leave them to their fates. Investors would likely shrug: Intel is worth less than $100 billion while Microsoft, Apple, and Nvidia are together worth $10 trillion.

The problem: Those tech giants’ software and devices are useless without the advanced semiconductors whose fabrication they contract out, especially to Taiwan Semiconductor Manufacturing Co. If China makes good on its threat to subjugate Taiwan in the coming years, the entire U.S. tech sector could be at Beijing’s mercy. (…)

Intel is the only U.S.-based company capable of competing with TSMC, and it is struggling to do so.

While Elon Musk’s SpaceX has outclassed Boeing when it comes to space transport, there are no homegrown alternative suppliers of large commercial airliners. Without Boeing, that business would go to Airbus and, eventually, China’s state-owned Comac, which is now delivering its own competitor to the 737 and Airbus’ A320, the C919. 

The loss of either company would have industrywide repercussions. Each supports a multilayered ecosystem of designers, workers, managers and suppliers. Once that ecosystem moves offshore, it is almost impossible to bring back. (…)

National security dictates the U.S. maintain some know-how in making aircraft and semiconductors.

Certainly other countries feel that way: European governments heavily subsidized Airbus. China is pursuing dominance in key technologies regardless of the cost. Its so-called Big Fund has sunk roughly $100 billion into semiconductors while aid to Comac had reached $72 billion in 2020, according to the Center for Strategic and International Studies. (…)

The goal of manufacturing strategy shouldn’t be just producing jobs but great, world-beating products. Washington can help by encouraging the world’s best manufacturers to put down roots in the U.S. That forces American companies to raise their game and nurtures the workforce and supplier network that serves all companies. The Chips Act, by encouraging TSMC and Samsung to build or expand fabs in the U.S., indirectly helps U.S.-based Intel, GlobalFoundries and Micron (all of which have received subsidies). (…)

Labor has a role here, too. Boeing’s union, whose leaders reached a new, enriched deal this past weekend, blamed the company’s woes on management—as did the auto workers who struck Detroit last year. But they are all in this together. Workers should weigh not just what Boeing pays in the next few years, but whether it will be around a generation from now.