INDEXMONTHLY

Figure 1: Equity Indices (1 Jan 2023 = 100)

11 January 2024

After a torrid rally in the nal quarter of 2023, equities appear to be taking a pause.

HIGHLIGHTS

• Easing US monetary
conditions drove a
sharp rally in equity
indices but the Federal
Reserve looks set to be
Source: Re nitiv
cautious on delivery

Time for a pause.

(page 2)

• S&P500 earnings
growth has stalled
over the past year with
leading indicators
pointing to weakness
(page 3)
• Valuations appear
stretched amid slowing
share buybacks and
elevated speculative
positioning (page 3)
• Excess liquidity
conditions have
dissipated rapidly
since mid-2023 raising
the prospect of a
moderation in the
pace of Federal
Reserve asset sales
(page 4)
• Nasdaq 100 valuation
appears stretched
amid investor
optimism (page 5)
Figure 3: Related & economic indicators (11 Jan 23)
Animal spirits reigned in the nal two Nasdaq 100 earnings have lifted at an
months of 2023 with the Nasdaq 100 annualised pace of 26% since April 2023.
index making an all-time high and the This has prompted a signi cant re-
S&P500 and Dow Jones index close by. appraisal of earnings expectations,
pushing the upgrade/downgrade ratio
The rally in the S&P500 index appears close to decade-highs with 12-month
to have been driven in large part by forward earnings rising in lock-step with
optimism that the US Federal Reserve will equity prices, stabilising the forward
shift to easing monetary policy in 2024, price-to-earnings ratio around 25x.
with US xed income futures projecting However, the global manufacturing cycle
approximately 150bp YoY of rate cuts. remains languid, increasing risk of
Optimism around the Fed has been earnings disappointment with scenario
associated with rising market analysis suggesting earnings and
participation and increasingly stretched valuation are a potential constraint on
valuation, risking of disappointment. further rapid gains this year.
The Minutes to the December Federal Figure 2: Price snapshot (11 Jan 23)
Reserve Open Market Committee meeting
Price, USD/oz Jan-24 %MoM %YoY
noted that interbank liquidity conditions
are tightening rapidly. This is likely to be S&P500 4,783 3.5% 22.1%
associated with funding pressure around
month-end, and tax payments, placing Nasdaq 16,793 3.5% 49.9%
pressure on the Federal Reserve to slow
Dow Jones 37,696 3.5% 11.8%
the pace of asset sales. While the equity
market will likely greet this news FTSE100 7,652 1.4% -0.6%
favourably, we believe it will have minimal
DAX 16,690 -0.6% 13.0%
impact beyond the announcement e ect.
Source: Re nitiv

Related indicators Jan-24 %MoM %YoY Related indicators Jan-24 %MoM %YoY

S&P500 12-mth fwd P/E 19.6 0.6 2.5 US 3-month T-bill, % 5.42 0.02 0.73

Nasdaq 100 12-mth fwd P/E 25.0 0.4 3.6 US 10-year bond, % 4.02 -0.21 0.41

S&P500 VIX, % 12.7% 0.1% -7.9% USD index, 5-country) 125.80 2.4% 1.9%

Nasdaq 100 VIX, % 16.6% 0.3% -10.3% WTI crude oil, USD/bbl 71.60 0.9% -4.7%

VDAX index, % 13.2% -0.5% -5.6% Gold, USD/oz 2,032 2.5% 8.2%
Source: Re nitiv

1 www.oanda.com
fi
fi
fi
fi
fi
fi
fi
ff
 Time for a pause?
11 January 2024
Stocks had a torrid rally into year-end, with the
S&P500, Nasdaq 100, and Dow Jones indices all rallying
11-14% since end-October with the S&P500 and Nasdaq
100 up 22.3% and 49.1% since end-2022. It appears to us
that equities are now taking a pause, with all three indices
INDEX MONTHLY
down modestly year-to-date.
We believe there are good reasons for equities to
pause. US monetary policy is now aggressively skewed to
rate cuts, yet the Federal Reserve remains cautious about
endorsing market pricing. Valuations are now elevated
and they need to be con rmed by corporate earnings.
Earnings growth expectations are in line with their longer-
term trend, yet indicators suggest risk of disappointment,
at least in the near-term. Meanwhile, indicators point to
elevated levels of con dence in equities, suggesting near-
term risk of a correction is elevated.
Fed to apply the brakes?
At their 13th of December Federal Open Market
Committee (FOMC) meeting, the US Federal Reserve
revised down its forward guidance, indicating that it
expected to cut the Federal funds rate to 4.6% by
end-2024, and 3.6% by end-2025. In response, xed
income market participants pushed interest rates lower
across-the-curve. The CME FedWatch tool currently
projects a 95% probability the Federal Reserve
commences cutting interest rates no later than the 1st of
May, with 150bp of rate cuts priced by year-end.
While the Federal Reserve indicated that it expects to
cut rates this year, the case isn’t clear-cut. Activity is
expected to run sub-trend but the unemployment rate is
projected to rise only modestly, to its Non-Accelerating
In ation Rate of Unemployment (NAIRU) of 4.1%, with core
PCE in ation expected to decline only gradually towards
the 2% in ation target. It appears FOMC members are
concerned that the xed income market may be getting
Figure 4: S&P500 EPS (%y/y) & ISM PMI
The subdued US non-manufacturing ISM PMI suggests S&P500
companies earnings growth is likely to remain near-zero in 2024 H1.
Source: Re nitiv, Redward Associates
2 www.oanda.com
fl
fi
fl
fi
fi
fl
ffi
fi
fi
fi
fi
fi
fl
fi
ahead of itself, with December Minutes noting “an easing
in nancial conditions beyond what is appropriate could
make it more di cult for the Committee to reach its in ation
goal.” Since then, FOMC speakers have indicated that while
interest rates look set to come down, the pace of decline
will remain data dependent, with little near-term urgency.
With the CME FedWatch tool projecting a >60%
probability of a 25bp rate cut by the 20th of March FOMC
meeting, we see scope for the Federal Reserve to dampen
down market expectations at their 31st of January meeting.
Valuations appear stretched…
Equity indices have run well ahead of both 12-month
trailing and 12-month forward IBES earnings estimates,
pushing the 12-month forward S&P500 price-to-earnings
ratio up to 19.6x while the Nasdaq 100 index has risen to
25x. This is well above the past decade average of 17.9x
and 21.7x, respectively, although below the 23.2x and
31.8x peaks experienced in September 2020.
S&P500 earnings per share has contracted 0.9% over
the past year but IBES projects earnings to lift 11.2%YoY in
2024, bringing them into line with its post-millennium
average. While analysts are con dent that earnings will
pick-up towards their longer-term trend, historical
indicators are less optimistic.
Since the millennium, S&P500 EPS growth (%YoY) has
lagged movements in the US ISM Non-Manufacturing PMI
by six months with a monthly correlation of 0.73. In
December, the PMI weakened to 50.60. While there is
evidence of a negative seasonal factor in that month, the
subdued ISM non-manufacturing PMI suggests little
upside momentum to earnings in 2024 (H1). The likelihood
of subdued earnings, at least in the rst half of this year, is
corroborated by the IBES upgrade/downgrade ratio, which
is currently sitting at -11.6%.
Figure 5: Upgrade/downgrade ratio & ISM PMI
Earnings have recently out-performed expectations but key drivers
of earnings growth look set to remain subdued.
Source: Re nitiv, Redward Associates
 Valuations stretch on investor optimism.
11 January 2024
Consistent with the subdued near-term outlook for
earnings, our model of 12-month forward IBES earnings
growth also suggests scope for disappointment. Our
model is based on the Federal Reserve’s Senior Loan
O cer Survey of Commercial & Industrial credit
INDEX MONTHLY
conditions, the ISM non-manufacturing PMI, the IBES
upgrade/downgrade ratio, and CEO con dence. This
model explains over 90% of the variance in 12-month
ahead IBES earnings expectations since the millennium. At
present our model points to a modest walk-back in
earnings growth expectations over the coming year.
…but can stretch further.
We view earnings growth expectations and valuations
as signi cant headwinds for the equity market, especially
given subdued activity and the possibility that the Federal
Reserve delays or curtails rate cuts. This doesn’t preclude
the possibility of further gains, potentially driven by
money ow (e.g. buy-backs and/or increased portfolio
allocation to equities), but this is likely to come at the
expense of further valuation stretch. For instance, should
the US economy experience near-recessionary conditions
consistent with zero earnings growth, a 10%YoY lift in the
S&P500 index would take its price-earnings ratio to 23.8x.
Share buybacks moderated…
S&PGlobal reported on the 19th of December that
share buybacks of companies in the S&P500 amounted to
USD 186bn in the third quarter of 2023, down 12%YoY. In
the 12-months to September 2023, share buybacks
amounted to USD 787bn, down 194bn YoY.
Buybacks were concentrated among the 20 largest
companies in the S&P500 index with S&PGlobal reporting
that in the 12-months to June, IT giants Apple (USD 91bn),
Alphabet (USD 55bn), Meta Platforms (USD 53bn), and
Figure 6: Buyback & dividend, USDbn & %
Subdued earnings growth is being increasingly felt in share
buybacks while companies continue to increase dividend payments.
Source: S&PGlobal, Redward Associates
3 www.oanda.com
ffi
fi
fl
fi
fi
Microsoft Corporation (USD 33bn) were the largest
purchasers of their own stock. Beyond IT, Wells Fargo
(USD 18bn), Lowes Companies (USD 15bn), Visa (USD
13bn), and JPMorgan (USD 11bn) were active buyers of
their own stock.
…as dividends increased.
While buybacks have recently eased, S&PGlobal
report dividend payments are increasing, with dividends
totalling USD 144.2bn in the third quarter (+2.7%YoY),
bringing the annual total to USD 580.2bn (+5%YoY). Given
subdued earnings expectations and elevated valuations,
we expect buyback activity to continue to soften.
Technicals appear stretched.
The rally in the S&P500 index through December took
it to a peak of 10.4% above its 200-day moving average,
with momentum indicators pointing to over-bought
conditions. Strong demand for short-term call options
pushed the 5-day put/call ratio sub-70% sending the VIX
index down to a low of 12.1%, close to its decade low
(9.1%), with pressure on brokers to hedge their exposure,
pushing stocks stronger. Robust sentiment was also
apparent in ETFs, with the MOOD ETF, an investment
product which aims to capture risk-seeking sentiment,
moving sharply higher.
While we’ve seen a modest correction in equity
indices year-to-date, the put/call ratio, VIX index, and
MOOD ETF, all suggest that investor sentiment remains
risk-seeking This suggests scope for disappointment as we
head closer to the January FOMC meeting and key
earnings reports released later this month.
Figure 7: VIX index (%) & MOOD ETF, USD
A range of indicators including the put/call ratio, VIX index and the
MOOD ETF all point to strong investor risk-seeking behaviour.
Source: Re nitiv, Redward Associates
 Easy liquidity conditions drawing to a close.
11 January 2024
Balance sheet contraction…
The US Federal Reserve reported holdings of US
Treasury securities and Mortgage Backed Securities (MBS)
fell to USD 4,753bn and 2,432bn, respectively, in the week
INDEX MONTHLY
ending 4th of January 2024. This represents a decline of
USD 711bn in US Treasuries and USD 210bn in MBS over
the past year. After factoring in other components of the
Federal Reserve’s asset base, notably the provision of USD
141bn in funds to the banking system under the Bank
Term Funding Program, the Federal Reserve has
contracted its balance sheet USD 842bn, to USD 7.731bn.
The contraction in the Federal Reserve’s assets has
been met with a decline in its liabilities. While the US
Government’s General Account at the Federal Reserve
increased by USD 335bn and reserve balances with
Federal Reserve banks increased by USD 433bn, this was
more-than o set by a USD 1,483bn decline in reverse
repo operations undertaken by the Federal Reserve
leaving the decline in assets and liabilities matching, as
one would expect under double-entry bookkeeping.
Since the end of May 2023, reverse repo operations
conducted by the Federal Reserve have declined by USD
1,530bn, with the decline in excess liquidity conditions
exacerbated by heavy US Treasury security issuance, as
the Treasury rebuilt its General Account in the wake of the
debt-ceiling impasse. At its trough, the US Treasury held
just USD 78bn in funds at the Federal Reserve but this has
now been rebuilt to a healthy USD 713bn. The General
Account has been steady around the USD 725bn level over
the past three months and we anticipate that tightening
liquidity conditions driven by US Treasury issuance has
more-or-less come to an end. While this source of liquidity
reduction has now occurred, money market funds
continue to shift capital from the overnight repo market to
Treasury bills and private repo operations. Given the yield
pick-up, this trend looks set to continue.
Figure 8: Fed assets, USDbn & S&P500
Despite the US Federal Reserve selling US Treasuries and Agency
mortgage backed securities, the S&P500 index has rallied.
Source: Federal Reserve, Re nitiv, Redward Associates
4 www.oanda.com
ff
ff
fl
fi
fi
ffi
…is tightening liquidity.
When examining liquidity conditions, the Federal
Reserve’s December FOMC Minutes noted that “aggregate
reserves across the banking system remain abundant, and no
signs of pressures were evident.” Given this, the Federal
Reserve looks set to continue to reduce its assets through
the sale of USD 60bn/month of US Treasury bonds and
USD 35bn/month of agency MBS. However, given the
rapid run-o of the Federal Reserve’s balance sheet
through Treasury and agency MBS asset disposal, easy
systemic liquidity appears to be nearing an end.
In her Opening Remarks to the American Economic
Association annual conference, Dallas Federal Reserve
President, Lorie Logan, noted that “as we did in 2018 and
2019, we are likely to see modest, temporary rate pressures
as our balance sheet shrinks and our liabilities redistribute.”
This will lead to increased pressure in the overnight
funding market “when liquidity is unusually encumbered or
is draining out of the system especially rapidly, like tax-
payment dates, Treasury settlements and month-ends.”
While the Federal Reserve’s Senior Financial O cer
Survey shows that most banks have ample reserves and
the Federal Reserve has support mechanisms in place,
notably through the Standing Repo Facility and the Bank
Term Funding Program, it is possible that pockets of
liquidity stress may emerge, moving the Secured
Overnight Financing Rate (SOFR) from its current level
around 5.30%, towards the Funds rate (5.50%). And it
appears likely that by mid-year, pressure will grow for the
Federal Reserve to moderate the pace of its asset disposal
program. While this will be motivated by tightening
liquidity conditions, it's likely to be favourably greeted by
stock market investors.
Figure 9: Reverse repo, USDbn
Liquidity remains ush with the Fed absorbing USD 1,085bn via its
reverse repo operations, but conditions are tightening rapidly.
Source: Federal Reserve, Re nitiv, Redward Associates
 Nasdaq 100 headwinds rising.
11 January 2024
The Nasdaq 100 index has had a stellar run over the
past year, surging to an all-time high of 16,906.8 on the
27th of December, before easing slightly to 16,793, with
the index up 3.5%MoM and 49.9%YoY.
INDEX MONTHLY
Strength in the Nasdaq 100 over the past year has
been driven by the mega-capitalisation rms; Nvidia
(+240%YoY), Meta Platforms (+179%YoY), Tesla (+90%YoY),
Amazon (+62%YoY), Microsoft (+62%YoY), Alphabet
(+56%YoY), and Apple (+40%YoY). However, the rally was
broad-based with 80% of companies producing a positive
return with an unweighted median gain of 27.4%YoY. With
the Nasdaq 100 index having rallied 16.5% since end-
October, it appears upward momentum is stretched.
Valuation headwinds.
Since 1985, the Nasdaq 100 index has appreciated at
a compound annual growth rate of 13.75% but the rally
has run ahead of its long-term trend, consistent with the
index being around 25% above its log-level trend. While
earnings growth rebounded since April 2023, rising an
annualised 26%, the lift in earnings has been insu cient
to prevent multiple expansion, with the price-to-earnings
ratio climbing from 27.6x to 29.1x. On a 12-month forward
basis employing IBES earnings expectations, the price-to-
income ratio has remained steady at 25x. This is well
above its post-GFC (2010-23) average of 20x but below the
pandemic-high of 31.8x in September 2020.
Risk earnings disappoint.
The rebound in corporate earnings since April has
occurred in tandem with a sharp rise in the IBES Upgrade/
Downgrade ratio, with that ratio now close to post-GFC
highs. Analysts now project Nasdaq 100 companies will
increase their earnings per-share 16.5%YoY (672.9). While
Figure 10: Earnings/share & ISM New Orders
The rebound in Nasdaq 100 corporate earnings has not been
corroborated by the ISM manufacturing index, which remains weak.
Source: Re nitiv, Redward Associates
5 www.oanda.com
fi
fi
fi
fi
fl
ffi
fi
ffi
this represents a deceleration from its current annualised
pace, it remains above the 2010-23 average (12.9%YoY).
In justifying corporate earnings projections, analysts
are likely to focus on company speci c opportunities in
areas such as arti cial intelligence, cloud computing,
robotics, or other potentially fast growing areas. However,
unlike S&P500 companies, companies in the Nasdaq 100
index tend to be closely aligned to the US and global
manufacturing cycle. Over the period 2010-22, the ISM
New Orders index led Nasdaq 100 corporate earnings (%
3m/3m AR) with a simple correlation coe cient of 0.73.
This relationship appears to have broken-down with the
ISM New Orders index languishing in contraction territory
at 47.1, consistent with a contraction in earnings.
Upside appears constrained.
While corporations are good at shaping expectations
to ‘beat-the-street’, we see scope for corporate earnings
growth to disappoint expectations over the coming year,
with scenario analysis suggesting headwinds are rising
and upside gains may be constrained.
With the Nasdaq 100 index at 16,793 and 12-month
forward IBES earnings expectations 672.9 this implies a
price-to-earnings ratio 25x. However, were earnings
growth to stall at current levels, this would imply a
forward price-to-earnings ratio of 29.1x (i.e. in line with
12-month historical), which is extended. This doesn’t
preclude further gains - driven by increased optimism
around interest rate cuts and/or money ow - but if the
Nasdaq 100 index were to rally 10%YoY, unchanged
earnings would push the price-to-earnings ratio up to
31.8x. That would take us back to levels prevailing at the
peak of monetary stimulus in September 2020, which
appears implausible, suggesting stock selection is likely to
play a more important part in performance in 2024.
Figure 11: Nasdaq 100 index scenario analysis
To strengthen more-than 10%YoY we need to see strength in
earnings growth relative to expectations & multiple expansion.
Source: Re nitiv, Redward Associates
11 January 2024
Economic and Events Calendar

Event Date Expectation

US Tesla Wednesday Jan 24th Consensus EPS estimate is USD 2.61/share.

Investor focus will likely be on increased competition,
particularly from BYD, the build-out of its battery storage
facilities & cyber-truck production.
INDEX MONTHLY

US GDP (Q4) Thursday Jan 25th The Atlanta Federal Reserve GDPNow estimate suggests
the economy expanded 2.2%QoQ SAAR in 2023 (Q4).

US PCE in ation (Dec) Friday Jan 26th Core PCE in ation is expected to rise around 0.2%m/m
bringing annual in ation down to 3.0%YoY.

US Microsoft Corp. Tuesday Jan 30th Consensus EPS estimate is USD 2.99/share.
Investor focus will be on Microsoft’s build-out of AI but the
company’s earnings remain driven by cloud computing.

US Federal Reserve FOMC Wednesday Jan 31st Futures price no change at this meeting but a 25bp rate
cut is 70% priced by the 20th of March with around 150bp
of rate cuts priced-in by year-end.

US ISM manufacturing PMI (Jan) Thursday Feb 1st After last month’s reading (47.4) manufacturing is
expected to remain in contraction with prices paid (45.2)
consistent with falling goods prices.

US Apple Inc. Thursday Feb 1st Consensus EPS estimate is USD 1.88/share.
While Apple continues to grow its service business,
earnings remain dominated by iPhone, with analysts
concerned holiday season sales may have disappointed.

US Alphabet Inc. Thursday Feb 1st Consensus EPS estimate is USD 1.17/share.
Revenue growth remains driven by Google Cloud but
Google Search retains market domination & advertising
revenue continues to expand at a near double digit pace.

US Meta Platforms Thursday Feb 1st Consensus EPS estimate is USD 1.96/share
Advertising revenue expanded 6.8%QoQ in 2023 (Q3),
expanding operating margins and when coupled with
expenditure restraint, net income jumped 48.7%QoQ.

US amazon.com Inc. Thursday Feb 1st Consensus EPS estimate is USD 3.60/share
Analysts expect Amazon to continue to grow earnings
rapidly, to USD 3.60/share (+37.4%YoY) but the
deteriorating consumer outlook is a risk.

US Employment Report (Jan)
Friday Feb 2nd The Establishment Survey (non-farm payrolls) have held
up despite the Household Survey suggesting employment
growth has stalled. Indicators point to a softening labour
market with risk to the Federal Reserve’s unemployment
rate forecast skewed to the upside.

US ISM Non-manufacturing (Jan) Monday Feb 5th Activity slowed (50.6) consistent with weakness in
household consumption activity while prices paid (57.4)
remains consistent with around 2%YoY in ation in
services, pointing to downside risk to PCE in ation.

6 www.oanda.com
fl
fl
fl
fl
fl
 12 January 2024
This report has been prepared by Redward Associates Private FCZO and is for general information purposes only. This report was
not prepared in accordance with any jurisdictional disclosure requirements related to research reports. Please see the full
disclosure in the Gold Monthly Report (below).

DISCLAIMER: This research has been conducted by Redward Associates Private FCZO and is for general information
purposes only. It does not take into account your personal circumstances and is not investment advice or an inducement to
trade leveraged products. Examples shown are for illustrative purposes only and may not re ect current prices or o ers from
OANDA. The views represented in this report are those of Redward Associates Private FCZO and should not to be construed as
the views of OANDA Asia Paci c Pte Ltd or any member of the OANDA group of companies. The information herein may be
INDEX MONTHLY

changed or withdrawn at any time without notice. You are solely responsible for determining whether leveraged trading or a
particular transaction is suitable for you and for seeking independent professional advice. You should rst consider your own
personal situation prior to making any investment decisions. Leveraged trading carries a high degree of risk. Since you could lose
some or all of your deposited funds, you should carefully consider your nancial objectives, level of experience and appetite for
such risk prior to entering this market. Most importantly, do not invest money that you are not in a position to lose. Please also
note that past performance is not indicative of future performance.

This report is prepared in collaboration with Redward Associates Limited FZCO.

Peter Redward
www.redwardassociates.com
p: +971 56 847 1123
e: peter@redwardassociates.com
IFZA Building | Dubai Digital Park | Dubai UAE

For more information, please feel free to contact us.

OANDA Asia Paci c Pte. Ltd. OANDA Australia Pty Ltd OANDA Global Markets Limited
1 Ra es Place Level 1 Kingston Chambers
#26-02 One Ra es Place Tower 1 60 Martin Place PO Box 173
Singapore 048616 Sydney NSW 2000 Road Town
p: +65 6579 8289 p: +61 2 8046 6258 Tortola
British Virgin Islands

OANDA (Canada) Corporation ULC

370 King Street West #302
Toronto, ON M5V 1J9
Canada
Tel: 1 877 OANDA FX (1 877 626 3239)

OANDA Europe Limited

Dashwood House
69 Old Broad Street
London EC2M 1QS
Tel: 44 020 3151 2050

e: frontdesk@oanda.com
w: oanda.com

7 www.oanda.com
ffl
ffl
fi
fi
fi
fl
fi
ff