1. Risk of sustained deflation is the elephant in the room in China inducing comparisons to Japan’s previous three decades of economic malaise.

China’s 10-year government bond yield dropped below 1.6% for the first time as falling stock prices foster demand for the safest assets.

“It seems like Chinese policymakers are “running out of magic here” after multiple rounds of stimulus have failed to kickstart consumer spending”, says Ed Yardeni.

2. China’s economy is burdened by years of excess, including hefty borrowing by government, households and corporations.

The overall debt-to-GDP ratio now exceeds the U.S. and Europe.

Overindebtedness, overbuilding and overcapacity are causing problems at home and abroad.

China’s property meltdown has since 2021 destroyed around $18 trillion of Chinese household wealth, according to an estimate by Barclays, eclipsing the losses suffered by Americans in the financial crash of 2008-09.

That hit, along with the trauma of Beijing’s heavy-handed response to the Covid-19 pandemic, helps explain why Chinese consumers aren’t spending freely.

3. US equities are rate-sensitive again as the 10Y yield has pushed through the 4.50% threshold.

This wil remain the most important variable to watch in early 2025.

There is certainly scope for “broadening” in US equity leadership in 2025, but it will be concentrated in higher quality stocks as we're entering a late cycle extension as opposed to a new cycle.

Also, the recent rise in rates provides another reason to stay up the quality curve as companies with stronger balance sheets/less leverage are likely to remain less rate sensitive.

Below: Equity valuations (P/E) going lower (right scale) as rates broke above the 4.50% level (left scale).

4. European cyclical stocks appear particularly vulnerable as investor sentiment seems increasingly fragile.

“In our view, the combination of high valuations and high earnings-growth expectations leaves no room for disappointment,” Societe Generale strategists say.

“We recommend defensive sectors over cyclicals given our sluggish growth expectations for the euro-zone economy, which contrasts with the high expectations embedded in the valuation of cyclicals.”

The strategists attribute cyclicals’ strength in the fourth quarter of 2024 to Chinese stimulus and the market-euphoria that greeted Donald Trump’s US election win.

However, economic surprises are fading fast and the latest Chinese data have underwhelmed. This is significant for the Stoxx 600, whose members generate 60% of their revenue outside Europe.

5. Shares of major alcoholic drink makers declined Friday after the U.S. Surgeon General issued an advisory outlining the link between alcohol consumption and increased cancer risk.

Anheuser-Busch was down another 3%, while the average target price from 30 analysts is €68.17

6. Tesla’s shares trade at about 117 times projected earnings for the next four quarters.

That is more than three times the multiple of AI champ Nvidia, and a sharp premium to other companies already making serious money on AI.

However, Tesla is a $1.2 trillion company worth more than the next 20 largest automakers combined, and the auto business that accounts for more than 80% of its annual revenue was experiencing its worst year on record.

Chris McNally of Evercore ISI said about $1 trillion of that market cap was implied for “projected” revenue from “things to come.”

7. The definition of insanity?

At least in the tech bubble, companies trading at absurd valuations can eventually become profitable.

Fartcoin is 100% speculation, has zero intrinsic utility and is now being valued at $1.5 billion.

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