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  • Consensus Very Bullish on the US Consumer

    Torsten Sløk

    Apollo Chief Economist

    The Fed’s pivot from hawkish to dovish and associated easing in financial conditions have boosted expectations for US consumer spending, see chart below.

    The consensus is very bullish on the US consumer
    Source: Bloomberg, Apollo Chief Economist

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  • A key reason why the economy is still so strong is the significant tailwind to growth coming from the CHIPS Act, the Inflation Reduction Act, and the Infrastructure Act.

    Monetary policy is using high interest rates trying to slow the economy down. Fiscal policy is utilizing open-ended policies to boost growth and employment.

    In short, the positive effects of fiscal policy are dominating the negative effects of Fed hikes, see chart below.

    Positive effects of fiscal policy dominating negative effects of Fed hikes
    Source: Census Bureau, Haver Analytics, Apollo Chief Economist

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  • Before the pandemic, the share of outstanding mortgages with interest rates below 4% was 38%. Today it is 63%, see chart below.

    In other words, housing is adjusting very slowly to Fed hikes. Millions of households still benefit from having locked-in low mortgage rates during the pandemic.

    Put differently, the transmission mechanism of monetary policy is much slower than normal, and the Fed will need to keep interest rates higher for longer to get inflation under control.

    The transmission mechanism of monetary policy is much slower because of the mortgage lock-in effect
    Source: FHFA, Apollo Chief Economist

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  • Looking at P/E ratios for companies in the S&P 500 ranked by market cap shows that large-cap companies are much more expensive than small-cap companies, see chart below.

    Why are P/E ratios low for small-cap companies and high for large-cap companies?

    Because Fed hikes and higher costs of capital are weighing on highly leveraged small-cap companies with low coverage ratios.

    And the AI story has boosted valuations of mega-cap names.

    With the Fed keeping interest rates higher for longer, and the AI narrative pushing valuations and index concentration to extreme levels, the downside risks to equities are growing.

    Large-cap stocks are much more expensive than small-cap stocks
    Source: Bloomberg, Apollo Chief Economist

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  • Thirty-five percent of the increase in the S&P 500’s market cap since the beginning of the year has come from one stock, see the chart below. Such a high concentration implies that if NVIDIA continues to rise, then things are fine. But if it starts to decline, then the S&P 500 will be hit hard.

    The bottom line is that the extreme concentration of returns in the S&P 500 makes investors more vulnerable to single headlines impacting the one stock driving index returns.

    NVIDIA accounts for 34.5% of returns in the S&P 500 in 2024
    Source: Bloomberg, Apollo Chief Economist. Note: Calculated as share of market cap growth since January 1, 2024.

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  • The Pain in Real Estate Continues

    Torsten Sløk

    Apollo Chief Economist

    It is remarkable how vacancy rates for commercial real estate are moving sideways or higher in a strong economy, see the first chart below. You would have expected that the ongoing strong growth in employment and GDP would push vacancy rates lower. If the Fed succeeds with slowing the economy down, then all these lines will move higher, and potentially very quickly.

    Combined with the steep maturity wall for CRE, see the second chart, the bottom line is that the pain in office, apartments, and industrial real estate continues.

    Vacancy rates rising for office, apartment, and industrial real estate in a strong economy?
    Source: Bloomberg, Apollo Chief Economist
    The CRE maturity wall is very steep
    Source: MBA, Apollo Chief Economist

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  • Car Sales Very Strong

    Torsten Sløk

    Apollo Chief Economist

    Although car sales are very sensitive to higher interest rates, the data for auto sales shows no signs of a slowdown. This suggests significant support for auto sales from wealth gains for households via higher stock prices, higher home prices, and higher cash flow from fixed income.

    No signs of a slowdown in auto sales
    Source: Bloomberg, Apollo Chief Economist

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  • Extreme Concentration in the S&P 500

    Torsten Sløk

    Apollo Chief Economist

    The top 10 stocks in the S&P 500 now make up a record-high 35% of the index, see chart below.

    The concentration in the S&P 500 is more and more extreme
    Source: Bloomberg, Apollo Chief Economist

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  • CRE in Trouble

    Torsten Sløk

    Apollo Chief Economist

    There are a lot of commercial real estate investments that need to be refinanced in 2024, see chart below. And rates higher for longer continue to have a negative impact across CRE.

    The CRE maturity wall is very steep
    Source: MBA, Apollo Chief Economist

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  • Global Economic Outlook Improving

    Torsten Sløk

    Apollo Chief Economist

    The consensus probability of a recession has declined significantly in recent months and now stands at 30% for the US, Europe, and UK, see chart below.

    The consensus probability of a recession in Europe, UK, and the US has declined significantly in recent months
    Source: Bloomberg, Apollo Chief Economist

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