January twentieth, twenty twenty-five to January twenty-second, twenty twenty-five

I. Foundation

resistance to change and hence greater dependability for the results shown in the past.

How much of Trump’s tariffs has the market priced in?

1）Wall Street is broadly watching S5MATR

2）Another way to track the buildup of “tariff risk” positioning is to compare the U.S. Dollar Index with the yield on 2-year Treasury bonds:

2025.01.22

Interest-rate levels, actual earnings, and the S&P’s valuation range

Goldman Sachs’s macro model calculations find that All else equal, for every 50 basis-point change in real interest rates, the fair P/E multiple for the S&P 500 changes by about 3%.

Chart: Real interest rates, implied valuations, and S&P target price

Higher-than-expected interest rates affect not only valuation multiples but also earnings to some extent. In practice, however, their direct effect on S&P 500 earnings per share is very limited: if the S&P 500’s financing costs rise by 50 basis points, all else equal, its earnings per share would fall by about 2%.However, the financing costs of S&P 500 companies do not move entirely in sync with Treasury yields, because most S&P 500 companies’ debt carries fixed rates and has long maturities.

S&P 500 nonfinancial companies currently have total debt of 6.2 trillion dollars, of which 94% is fixed-rate debt, and 51% of the debt will mature in 2030 years, which is why, since the record low in 2022, the average borrowing cost of S&P 500 companies has risen by less than 100 basis points (from 3.0% to 3.9%), even though 10-year Treasury yields have risen by more than 200 basis points.

When interest-rate changes are driven by improving growth expectations, equity markets usually absorb rising yields more easily. The outperformance of cyclical sectors reflects investors’ steadily improving growth expectations, while the stabilizing performance of Cyclicals vs. Defensive reflects a stable growth outlook.

Chart: Cyclicals vs. Defensive performance in Europe and the United States

Thus, the chart above makes it very clear that Trading in the United States is already reflecting a stable growth outlook, while Europe has been trading on steadily improving growth expectations since 25.

Read this alongside Notes 250121: Wall Street’s Next Bet: Europe’s Revival.

2025.01.23

II. Insights

Our Viewpoints and ideas on market.

Interest-rate pricing, safe assets, and behavioral mechanisms

Changes in bond yields and the market’s response are now gradually becoming a “coercive mechanism”, and the effects of this behavioral adjustment are not limited to economic policy itself but are also gradually extending into broader social and political spheres.

Public trust in traditional parties in Europe is declining, with voters turning to non-mainstream parties, including far-right and far-left parties, such as Germany’s AfD and France’s National Rally. Current polling data clearly show that support for these nontraditional parties is rising.The party disputes inevitably come back to the same issue: under fiscal leadership, how much will be spent, and how will it be used?

Behind national debt lies a rotation in safe assets, demand for U.S. Treasuries from China continues to weaken, as shown below. The white line represents China's holdings of U.S. Treasuries, the orange line the PBOC's gold holdings, and the blue line the 10-year Treasury yield. The rotation in safe assets is pushing interest rates higher, and rising rates inevitably prompt discussion of fiscal sustainability; that discussion further deepens the narrative crisis in safe assets, These developments reinforce and intensify one another.

Chart: Chinese demand wanes

Chart: GS has also softened on rate decisions

U.S. equities are extending the trend from the end of 12 last year, with price swings quite sharp at the start of the new year. At the very least, the market is now in a transition period—not merely a transition in trading logic, but a shift, under a broader market logic, to a new policy framework.The key change in the trading environment brought by this transition is a wider range of possible outcomes. That means more uncertainty and more friction, reflected in the market as a reduction in portfolio risk allocation.

The next question is: how should trading strategies be adjusted?

The main trend in U.S. equities is still likely to be upward, but elevated volatility may persist for some time, In other words, after two years of high Sharpe ratios and excellent beta returns, the market will lean more toward a “Trader’s Market” rather than a simple “People’s Market”; clear-cut opportunities will be significantly fewer.

If brute-force trading worked last year, more finesse and flexibility may be needed at the start of this year.

Outside equities, it is important to go with the trend and not oppose the core trends, including a strong dollar and a steep yield curve, because no one knows what a new policy framework will ultimately bring.

Chart: The current rebound in interest rates is indeed very rare

2025.01.20

The dollar’s upside potential

As mentioned in Notes 250120, Interest-Rate Pricing, Safe Assets, and Behavioral Mechanisms, our market is in a transition period—not merely a transition in trading logic, but a shift, under a broader market logic, to a new policy framework.

In this context, the dollar’s recent strength may mainly reflect the resilience of the U.S. economy and a shift in policy expectations, rather than a higher tariff premium. This means that the subsequent implementation of actual tariffs could further strengthen the dollar. USD/CNY are likely to weaken to 7.40 within 3 months, then gradually to 7.50; the eventual exchange rate will depend on policy choices.

The dollar’s strength could ultimately allow U.S. equities to continue rising alongside economic performance, but If either of the following two near-term risks materializes, equities may come under pressure:1) A further rise in Treasury yields, whether due to stronger inflation data or growing fiscal concerns; 2) weak macroeconomic data that leads the market to question the sustainability of U.S. economic “exceptionalism.”

In the first scenario, the overall outlook for the dollar would be positive. In the second, the dollar may perform unfavorably against currency pairs that are not risk-sensitive (such as EUR/USD) and safe-haven currencies (such as JPY and CHF).But in either scenario, SEK will generally come under pressure, while the bullish trend in USD/SEK is relatively persistent.

Chart: The next technical level is roughly at 11.60

2025.01.21

Wall Street’s Next Bet: Europe’s Revival

Since the financial crisis, Europe and the United States have taken two starkly different paths, the chart below compares post-crisis per-capita GDP growth in the United States and Europe, clearly showing significant weakness in growth across Europe:

Chart: Per-capita GDP in the United States and Europe after the crisis

Behind the crisis in the economic model lies a crisis in the social and political system, just as Notes 250121, Interest-Rate Pricing, Safe Assets, and Behavioral Mechanisms wrote, traditional mainstream parties in Western Europe are facing the greatest pressure in their history.

By 25, The Europe revival trade is now being put on the table by some investors, European equities outperformed expectations throughout January this year, and banks, which had languished for a long time, broke out decisively after 8 months of consolidation.

Chart: European markets overall delivered an upside surprise in 25

Chart: Major sectors make a significant breakout

Wall Street investors broadly believe that, amid enormous economic pressure, the renewed growth sentiment that has emerged since Trump took office could provide a sufficiently powerful catalyst for substantial change in Europe. Europe needs to keep pace with growth in this newly accelerating global economic competition; this is a game it has to join for political reasons.

More and more evidence suggests that this change is possible:

1) Last week, the Bank of England followed the United States’ lead, delaying the implementation of Basel regulatory reforms until 2027;

2) Rachel Reeves, the finance minister in the U.K. Labour government, significantly changed her position in her latest media exchanges, sending regulators a message: asking them to shift the focus back from risk prevention to putting growth first.

Image source: Mondaq

Image source: FT

“Media reports say U.K. Finance Minister Rachel Reeves wants regulators to take more risks and reduce overly cautious rules that hinder economic growth. Apparently, this Thursday she will meet with the heads of the U.K.’s largest regulators, including the Financial Conduct Authority (FCA) and the Securities and Exchange Commission (CMA). She wants these bodies to outline plans to promote growth in their respective industries by reducing red tape and opening markets to new entrants. Before Christmas, Reeves wrote to 16 U.K. regulators, asking them to propose plans by this Thursday to make their respective sectors more conducive to growth and investment (we’ve heard this before). Reportedly, Reeves called this meeting to hear their plans in person and challenge those that are not ambitious enough. The biggest complaint Reeves has heard from business groups is red tape, so she wants to address their concerns. The timing was chosen because Reeves will give a speech in two weeks.”

On the fiscal front, regarding defense spending, EU spending has increased by 50% from its recent low and is still rising:

Image source: Fiscal/Defense Spending Surge

London-listed diversified industrial company Smiths Group broke to a new all-time high. The move followed the company’s announcement that a new, rare U.S. activist shareholder had emerged, calling for a more proactive approach to creating shareholder value:

Image source: U.S. capital is trying to revitalize European assets

Just a few days ago, Rio Tinto and Glencore continued negotiating what would be the largest mining merger in history.If the two companies merge, they could overtake BHP (BHP), currently the mining industry's leader. The main driver is producers' desire to expand copper production, and this time BHP/Anglo’s standstill agreement has also expired. Glencore and Rio Tinto each own some of the world’s highest-quality copper mines. Glencore raised the idea in 2014, but it did not succeed at the time. If it happens this time, it would be a major landmark event for European equity indices as a whole.

Image source: Bloomberg report

Some of Europe’s most important luxury-goods spending is now also making a strong comeback led by Richemont (see Notes 250120, Consumption’s Major Turning Point),In the current economic and interest-rate environment, European indices may continue to outperform.

2025.01.21

III. Market Pulse

Our latest Comments on the economic and market environment

Consumption’s Major Turning Point

European luxury goods have strengthened, led by Richemont’s results that exceeded expectations, benefiting from a stronger U.S. economy and unexpectedly stable sales trends in Asia, in essence, currency weakness has provided a tailwind for the export-oriented part of the market.

Chart: Richemont trading at new all-time highs

Beyond the earnings leadership, the luxury sector’s strong comeback is also linked to the Trump team’s discussion of replacing a one-off, large tariff increase with tariffs that rise by 2 -5% each month. The news was the immediate catalyst for buying sentiment.

The main market debate now is that many hedge funds are torn over whether to short this luxury rebound, because the sector’s 14-day RSI is currently in overbought territory and its trading price is above the 200-day moving average. But shorting is very risky as long as the macro narrative remains unchanged. The broad strength shown in this earnings season is driven by more than brand momentum, with Richemont exceeding expectations in every category, region, and channel. This shows that current growth is no longer driven solely by the brand momentum of Cartier and Van Cleef。As the luxury sector bottoms out, its rebound is likely to continue if currency trends remain unchanged.

Broad earnings outperformance suggests that industry demand may indeed be near an inflection point, and momentum-driven sectors are likely to continue performing well in the short term. The counterargument from luxury bears is that an improved U.S. outlook is already priced into the market, so by itself it is not enough to drive further upward revisions in expectations, But another point worth discussing is that the Chinese market is now also showing early signs of bottoming and rebounding; that is the hard key.

2025.01.20

Consumption’s Major Turning Point (supplement): Characteristics of the luxury-goods industry

LVMH will report earnings on 1.28. After Richemont’s results, market expectations for LVMH’s growth adjusted for exchange rates have risen, but mainly in the fashion and leather goods and watches and jewelry segments.

Let me explain in more detail Notes 250120, Consumption’s Major Turning Point The phrase “European luxury goods have strengthened, led by Richemont’s results that exceeded expectations,”in essence, currency weakness has provided a tailwind for the export-oriented part of the market.” Investors’ main concern about the luxury sector is currently margins. The market assumes that LVMH will continue to spend heavily on its brands in a difficult industry environment, but the performance boost from exchange rates may offset this effect.

Luxury goods are a momentum-driven sector, and as long as the news flow continues to improve, the sector should continue to perform well.Visibility for 25 remains low at present. Greater confidence in a recovery in the Chinese market is needed to attract long-term investors, but positioning remains light, and LVMH next week could once again report results above expectations.

Chart: Global tourist duty-free spending is picking back up