Mumbai. The newsflow on the ongoing activities of DOGE remains dramatic. And markets are beginning to price it. GREED & fear’s guess is that the 10-year Treasury bond yield, at 4.3%, would be higher today if DOGE did not exist.
Still it is also the case that US economic data has begun to weaken even before the likely deflationary impact of DOGE has begun to show up. On this point, the Atlanta Fed’s GDPNow estimate for the current quarter has declined from 3.9% to 2.3% in the past three weeks (see Exhibit 1). The next update will be on Friday.
Weaker growth will not in GREED & fear’s view be good for equities, most particularly in a US stock market where multiple expansion last year means it is not priced for negative earnings surprises, as previously discussed here (see GREED & fear - Warning signs, 2 January 2025). On that point, earnings disappointments have been rising in the latest earnings season, as highlighted recently by Jefferies’ quantitative strategy team (see Jefferies report: “USA Quant: 4Q24 Results Explain Growth Beating Value”, 18 February 2025). Thus, the consensus S&P500 EPS growth forecast for 2025 has declined from 14.2% at the start of this year to 12.6% at present. Downgrades are broad-based, though for now only marginal, with even the Magnificent-7 excluding Nvidia witnessing earnings forecast cuts. The 2025 EPS for the S&P500 excluding Magnificent-7 has been revised down by 1% over the past three months, with the EPS for the Magnificent-7 excluding Nvidia downgraded by 0.2% over the same period (see Exhibit 2).
The above means there is a growing likelihood that the widespread talk of “American exceptionalism” at the end of last year, as applied to the stock market, was a signal of a major top in the American stock market both in absolute and relative terms. GREED & fear’s base case until proven wrong is that the US has peaked as a share of world market capitalisation as have the US Big Tech stocks. The MSCI USA’s weighting in the MSCI AC World Index peaked at 67.2% in late December and is now 65.3% (see Exhibit 3). While the four major hyperscalers and Nvidia now account for 14.3% of MSCI AC World (10.3% excluding Nvidia), down from a peak of 15.4% (11.1% if Nvidia was excluded) reached in late December (see Exhibit 4).
Meanwhile the next US inflation data, after last month’s disappointment, will be important to monitor given that the Federal Reserve will be looking for an excuse to ease on any weaker data. The direction of travel was clearly indicated by the release last week of the minutes of the Fed’s meeting in late January. The minutes showed a growing willingness to end or at least reduce further the pace of quantitative tightening currently running at US$60bn a month (see Reuters article: “Fed officials weighed slowing or pausing bond drawdown last month”, 20 February 2025). Certainly, with the Trump administration seeking to establish DOGE’s credibility in the eyes of the bond market, it could be argued that the last thing needed is for the Fed to reduce further its holdings of Treasury bonds.
Any renewed easing by the Fed will be a relief to the emerging market asset class which would like to see a weaker US dollar, as indeed would by all accounts Donald Trump and his Treasury Secretary Scott Bessent. One such emerging market is India.
In India for the first time since the stock market started to correct properly, GREED & fear’s base case is that the sell-off is primarily technical in nature reflecting multiple compression rather than any drastic macro issues.
The sell-off has also been more painful than suggested by the Nifty benchmark index because of the much bigger decline in the small and mid-cap stocks where multiples were much higher (see Exhibits 6 and 7). The Nifty MidCap 100 Index has declined by 19.4% since peaking in late September, compared with a 14.2% decline in the Nifty. Indeed the MidCap index has underperformed the Nifty by 10.8% since its relative performance peaked in mid-December. A major driver of the sell-off has been aggressive foreign selling. Foreigners have sold a net US$12.2bn worth of Indian stocks so far this year, after selling a net US$12.3bn in 4Q24 (see Exhibit 8).
