New York, NY, InfraCap Exclusive Report ~ We are raising our year-end price target on the S&P to 5,750 from 5,500 based on the increased conviction that the AI boom will propel tech stocks higher and plunging global inflation will allow global central banks to cut rates aggressively in the second half of 2024, causing a broader rally in interest-sensitive and value stocks. Our target represents 21x the consensus 2025 S&P earnings estimate of 273. Our discounted cash flow valuation model indicates that a 21x market multiple is an appropriate multiple if the 10-year treasury falls to a yield of 3.35%. We forecast that the 10-year falls to a range of 3-3.5% by year-end based on global rate cuts and the associated liquidity injections required to lower rates.
Skeptics have discounted the AI revolution, asserting it is a bubble similar to the internet tech bubble and will soon fizzle out. Nvidia’s recent earnings report and commentary indicated instead that the demand for AI chips was accelerating with good medium-term visibility on demand. In addition, major non-tech corporations, such as JP Morgan, have reported widespread adoption of AI tools integrated into their operations, countering the skeptics assertion that there was only R&D taking place with limited real-world applications.
We believe that the AI boom is in the early stages of development with the leading AI company, NVDA, continuing to be reasonably priced at only 34x consensus earnings estimates, which is very low compared to its expected 2025 fiscal year earnings growth rate of almost 90%. In addition, there have not yet been obvious signs of a speculative top that normally features hot IPOs of money-losing companies that skyrocket on the first day of trading. Finally, it is important to note that efficient capital markets such as the US market, will overvalue the existing companies in promising technology areas as that attracts additional private capital into the sector which speeds up time to market. Time to market is the most critical factor in emerging technology areas as there are significant first-mover advantages and that dynamic is why the US has spawned most of the world’s leading tech companies such as AAPL, GOOGL, AMZN, and MSFT.
We are forecasting that headline Euro Zone inflation will decline to only 1.5% by the end of April with Core inflation to be approximately 2.1%. The dramatic decline will be driven by base effects as we roll off extremely high monthly inflation prints that occurred from February to April of 2024. This dramatic decline in inflation will require the ECB to cut rates in June as the Euro Zone economy is very weak, with Germany already in a recession. The ECB’s rate cut will cause global bonds to rally since international bond prices are more correlated than equity prices. We are also forecasting that the year-over-year US core PCE gradually decline to 2.5% by the end of May, which will set the stage for a Fed rate cut at its late July meeting. It is important to note that both CPI and PCE inflation are distorted by archaic data collection methods and the recent reported rise in owner’s equivalent rent, which caused CPI and PCE to spike, was solely driven by a revision to its flawed methodology, not by changes in market rents. Austan Goolsbee recently acknowledged the flaw in the shelter calculation, and, although the Fed is going to be unwilling to alter its overly rigid methodology of focusing on its unadjusted Core Y/Y PCE target of 2%, we expect the Fed will be willing to slowly ease policy from its current overly restrictive stance once core PCE hits 2.5%. We project that the Fed will execute 3 rate cuts in 2024. which is consistent with the dot plot projection.
Many investors do not appreciate that central banks cannot lower rates by edict but rather have to inject liquidity into the banking system which causes the money supply to increase. This injection of liquidity has a strong tendency to drive both stock and bond prices higher as we saw in 2020 and 2021. In fact, the global monetary base (See www.infracapfunds.com) increased by over 60% during this time frame. Consequently, it is a simple rule of investing to be aggressively invested during periods of global rate cuts and very cautious during periods of tightening, such as the 2022 global policy tightening. We believe that many investors tempted by the high rates available on short-term deposits will keep assets in short-term cash equivalents and will miss a potentially significant rally in stock and bond prices as central banks cut rates in the second half of 2024.
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