US fiscal drag, worrying equity valuations, and nuclear power

US fiscal drag, worrying equity valuations, and nuclear power

Equities 5 minutes to read
Peter Garnry

Chief Investment Strategist

Summary:  Equities were wobbling in August with all our theme baskets down except for the nuclear power theme basket highlighting the higher for longer narrative. However, recent economic data have been weaker than estimated and the US fiscal impulse could soon turnaround from being positive to negative lowering economic growth and forcing the Fed to cut the policy rate in early 2024. This would obviously be a negative environment for equities and adding to our worries on equities are the elevated equity valuations on global equities reaching levels consistent with a negative outlook.


Key points in this equity note:

  • US fiscal impulse will soon turn from positive to negative impulse which will begin to put pressure on economic growth and open the path for Fed rate cuts, which could become a negative catalyst for equities.

  • Global equity valuations have reached stretched levels consistent with low long-term real rate returns. Equities are basically priced for now slowdown in the economy or margin pressure.

  • While green transformation stocks were under heavy pressure in August amid a string of bad news including the collapse in Orsted’s share price, our nuclear power theme basket rose in August as the only theme basket on improving market fundamentals for uranium.

Will the economic cycle turn as US fiscal impulse goes negative?

Last year in July, the US fiscal deficit in percentage of nominal GDP stood at 3.7%, but as the Biden Administration launched a series of fiscal spending bills, including the groundbreaking US CHIPS Act, the fiscal deficit expanded to 8.4% of GDP. This constitutes an almost 5%-points increase in the fiscal deficit which create a significant fiscal impulse dynamic into the US economy. This impulse helped the US economy avoiding a recession this year as the fiscal impulse more than offset the historic rise in the Fed’s policy rate.

In July of this year, after a year of positive fiscal impulse, the fiscal deficit contracted a bit suggesting that maybe the fiscal cycle is turning. If this is the case, then over the coming year the economy will likely begin to slow down in a pace that will warrant the Fed to cut its policy rate to balance the economy. Depending on inflation dynamics and the Fed’s reaction time, the economy could slip into a recession in 2024 or at best find itself in a stagflation environment.

Equity valuations reflect “as good as it gets”

Given the likely turn in the US fiscal impulse the macro investor might favour defensive equities over cyclical equities and bonds over equities. The investor might be further confirmed in this opinion by the fact that global equities have seen their equity valuations bounce back to being almost one standard deviation expensive relative to the long-term historical average. The current equity valuation level on the MSCI World is consistent with higher probability of negative real rate returns over a 10-year period than positive real rate returns.

Nuclear power was best performing theme in August

Despite a good week in global equities August was a bad month for our equity theme baskets with especially a lot pain in our energy storage, renewable energy, and green transformation baskets. The big story in the green transformation trade was the DKK 16bn impairment announced by Orsted due to supply chain costs, higher interest rates, and lack of progress in additional US tax credits all related to its US offshore wind projects.

Not all theme baskets related to energy have done bad in August. Our commodities theme basket was only down 2% in August outperforming the MSCI World Index driven by gains across many commodities including strong gains in crude oil. The best theme basket in August, and the only one gaining, was our nuclear power basket which increased 3.8% as prices on uranium continues to go higher with worries over the coup in Niger, home the seventh largest uranium mine in the world, adding to the pressure. Cameco, one of the largest global providers of uranium fuel, lifted their outlook in their FY23 Q2 results highlighting improving market fundamentals and increasing excitement from governments as nuclear power is increasingly seen a solution to decarbonize the global economy.

Adding to the nuclear power narrative, Sam Altman, co-founder of OpenAI, recently announced the intention to merge his small modular nuclear reactor company Oklo with a SPAC to go public under the ticker code ALCC. The fact that there is enough public investor interest in emerging nuclear power designs and technologies says a lot about how much the narrative around nuclear power has changed. We remain long-term positive on nuclear power.

Quarterly Outlook

01 /

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992