Before you know it, the magical year 2023 is coming to an end. As 2024 arrives, Albert Edwards, a global strategist at Société Générale, known as the "Société Générale Big Short", warned of the potential variables that could shake the global financial markets in 2024 in the last Global Strategy Weekly Report of 2023. In the report, Edwards focuses on the instability of the U.S. technology sector and its potential impact on the overall market, as well as the likelihood of a U.S. recession. Edwards warns that the bursting of the bubble in the US IT industry could be the biggest market "black swan" event in 2024:
The biggest surprise in 2024 may be the bursting of the U.S. tech bubble, dragging the entire U.S. market into recession.
The biggest black swan of 2024: the bursting of the U.S. tech bubbleEdwards mentioned that the failure of the "widely predicted U.S. recession" to materialize was one of the macro "surprises" of the year. The explosion of AI has driven the surge of the IT technology industry in the United States, which is another big "surprise" this year. In his report, he wrote:
2022 has been a bad year for tech companies, which have suffered a double whammy of profit warnings and rising bond yields.
After ChatGPT debuted in 2023, there was a FOMO (fear of missing out) frenzy, which was not interrupted even if bond yields soared above 5%.
Next, Edwards acknowledged that the astonishing performance of American "tech" this year was largely driven by the tech "Big Seven" – Apple, Microsoft, Google, Amazon, Meta, and the latest entrants to the group, Nvidia and Tesla. In the report, Edwards lamented:
This makes US tech stocks now contain almost a third of the US market capitalization (2 times what it was 5 years ago)!
Looking ahead to 2024, Edwards predicts that the U.S. technology sector will dominate the U.S. stock market as it did during the brief frenzy of the summer of 2000. Notably, Edwards cautioned that until the "Powell pivot" at the end of 2018, U.S. tech stocks were only "slightly above the market" in earnings ratios, and both were in the tens of times forwards. At present, the overall market is less than 20 times (i.e., a 7x premium) compared to the 12-month forward P/E ratio of the US IT industry of 27 times. In the report, the veteran strategist warned:
The biggest surprise in 2024 may be the bursting of the U.S. tech bubble, dragging the entire U.S. market into recession.
Technicals: U.S. stocks look a little overheatedEdwards also mentioned that technical indicators show that U.S. stocks are looking a little overheated at the moment. This is supported by a number of indicators. For example, CNN's Fear & Greed Index shows extreme greed, while price momentum, bullish/bearish ratios, and volatility all show signs of stretching. It is worth mentioning that in July of this year, CNN was at such a high level, and in the following three months, the market corrected sharply by almost 11%. In addition, the current reading of 79 is extremely greedy, in stark contrast to the low fear signal of 38 at this time last year.
In addition, the long-short balance of retail investors is rapidly approaching record highs, which is also a signal that the market is about to correct.
What is certain for the time being is that whether the U.S. stock market will be bearish in the future will depend on whether the U.S. economy will fall into recession. However, the recent stellar S&P index does not seem to hint at the risk of a recession in the US economy. In the report, Edwards quoted Gerry Minack, a well-known figure in The Australian Daily News, as saying:
Two months before a recession begins, the S&P 500 is typically down 2% from its cycle high.
The previous article pointed out that although the resilience of U.S. consumption, the slowdown in the inflationary labor market, and the early easing of the Federal Reserve have made the U.S. economy a "soft landing" and the possibility of non-recession interest rate cuts increasing.
But markets still need to be wary of three key factors that could turn the current expectation of a "soft landing" into a severe recession. The first is the recurrence of inflation, followed by a larger-than-expected fiscal retreat, and finally a larger-than-expected economic cooling.
On the day of the Federal Reserve's official announcement that it would "start discussing interest rate cuts", all assets in the United States started a carnival rally, with stocks, bonds, oil and gold rising together.
It seems that as soon as the interest rate is cut, the problem will be solved, but will the interest rate cut really solve the problem? I am afraid that this may not be the case.
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