Choppy Path to a Sensible 7,500 Level on S&P 500 – Felix Zulauf

Felix Zulauf is more listenable than what the headline suggested. I decided to take notes, not because I agree with him but that this is part of my meditation to digest the market.

Felix seem to think that there are a lot of people that do not know what to do with their money. He finds it interesting that many analyst in the news is getting very bearish, not optimistic just when he is thinking of revising his forecast upwards.

In Felix’s last appearance in Dec 2024, he mentions the following:

1. There is going to be a global contraction of liquidity that could set the stage for severe market corrections and increased volatility.
2. Stocks will peak early in 2025 and then experience a 15-20% correction.
3. New US trade tariffs could lead to retaliatory measures from trading partners, triggering a global trade war.
4. Recommend investors start 2025 more defensive, reducing equity exposure, long duration bonds and load up on Treasury Bills and Gold.

You can reflect how many he got correct.

So now that we had a market correction, increase volatility, a trade war how does Felix see things going forward?

1. It is likely we will have a global recession in the second half of the year. By then, there should be a retest of the low. Felix actually thought that we would go closer to 4,800 on the S&P 500 and 17,000 on the Nasdaq.
2. We should frame this as a major re-arrangement of geopolitics, economics and capital flows. This will take many years to play out. The first thing investors need to consider that future environments might be very different from in the past.
3. Trump has China in his cross-hair and to a smaller extent Europe so as to get the trade balance right.
4. China has a East Asian development model which is full employment, market share and not so much profitability of the corporate sector. This is not compatible with the Western corporate model.
5. Eurozone tends to be more protectionist though not everything.
6. United States is a model that creates incentive to overconsume, no savings, don’t produce. Donald Trump does not address the lack of savings.
7. The tariffs have shattered confidence and created mistrust among friends. This may take many years to repair.
8. The corporate sector is in a funk how to play this. They might need to be in the United States in certain products, investing less in Asia and Europe. This might play out the way Trump wants.
9. However, this will not be good long term if he does not fix the lack of savings part.
10. Currently, when you run a trade account deficit, you run a capital account surplus. The capital account surplus, in the hands of foreigners, ends up in Treasury bills, corporate, municipal bonds and US equities. This means that the foreigners will also have tools to push back.
11. We are seeing a capital outflow or repatriation of capital back to the home countries. Some assets can be sold fast some slower. We are seeing this reflected in the currency markets.
12. The USD is likely to see a multi-year decline. Felix expect the DXY (the USD Index) to dip to as low as 97 in the index several weeks, which will be a medium term bottom.
13. Then it would bounce but the money repatriation will continue because Donald Trump needs to fix this problem within a short window.
14. Trump would have to get the economy going again before the mid-term elections. If the Republicans lose the mid-term election, they might lose the Senate and the House, Trump’s agenda might be mitigated.
15. The sell off is probably over. We might see a retest of the low in May and then we will have a rally in the markets. If there are no recession the rally might peak in 2027.
16. If we do have a recession, we will retest the lows in the second half of the year, but Felix doesn’t think we will go lower than where we have been. 4,500 – 4,800 is the target in this scenario. The lows are likely in the Fall (Dec 2025 period)
17. There is likely going to be a lot of chop or sideway action. This is the “repair work” that the markets will have to go through.
18. He thinks the S&P 500 will be at 7,500 in 2026.
19. We should see economic policy towards stimulation on the fiscal side via lower taxes in the US or through government spending in Europe. China will have to step up their stimulation from minor to major levels. The markets should be ready to run for another 18-24 months.
20. He finds it weird that he was concern at the start of the year while everyone is not and now everyone is concerned while now he is less.
21. Everything tells him this feels like a medium term low. We had the low at 4,835, then we bounce off that low. Usually we bounce off a selling climax low that had an extreme number of new lows. All of what he observe tells him this is a washed out. Bank of America just came up with their regular Fund Manager Survey, which is the most pessimistic survey in 25 years. We would usually have a retest of the lows and usually the lows is slight above the previous low, at or slightly below the lows. If we don’t see a retest but a relentless rise, then we might get higher before we do a deeper retest back to the lows (4,000 to 4,500 level). Everyone should recognize what we are observing is classic bottoming actions.
22. Investors should keep their powder dry and be aware there is many whipsaws. When there is a sell-off, buy into the stocks that they wish to be long. Don’t sell to fear when there is sharp setbacks. Investors should be very aware that they are uncomfortable and do the exact opposite.
23. There should be a relative outperformance of foreign markets to the US. The US exceptionalism is due to very high budget deficits and that is about to change.
24. If the Trump administration will attempt to run a high budget deficit, the bond market will riot and the Treasury will see the market yield go much higher.
25. The Artificial Intelligence play is over, although some of the Mag 7 stocks would have sharp run ups but might not benefit the run up to 2027.
26. He favors companies on the industrial side that have a protected position in the US market and could benefit from the changes that is going on.
27. He would avoid platform companies like Apple. Apple produce their cell phones at $100 in Asia, with another $50 on overheads. They then sell this phone to their Irish subsidiary who makes a huge profit by selling it to the US and it is taxed at 4% because there is a tax code between Ireland and US. All the big profits go virtually tax free. Gains like this may be a thing of the past.
28. Investors might need to scrutinize the company they own whether the tax rates are too low because that might not be sustainable in the new regime.
29. Kyith: this is what I found on Wikipedia on Ireland corporate tax: Ireland’s “headline” corporation tax rate is 12.5%, however, foreign multinationals pay an aggregate § Effective tax rate (ETR) of 2.2–4.5% on global profits “shifted” to Ireland, via Ireland’s global network of bilateral tax treaties.
30. The subcontractors may benefit from this European fiscal wave.
31. He does not like Europe long term as borrowing to stimulate the economy is likely not sustainable in the long term. Inflation will eventually be created and there will be more problems.
32. US basically doing Europe and Europe doing US.
33. He thinks Asian stocks is going to do relatively well.
34. He is bearish on bonds. He was the first who wrote in Jun 2020 that bonds are a sell of the generation. He was also the first to wrote a report in 1981 that bonds were a buy of a generation.
35. The rates should stay around 4.6-5% and if recession at most it will get to 3.5% and likely won’t go lower.
36. Felix has been bearish on oil for 3 years. His target was below $60 in crude oil and he likes the current level. Oil is approaching a major bottom and he expect oil to be at $150 – $200 in 2027.
37. Gold will go up due to the geopolitical changes and these regime shifts. But currently, we are in the later stage of a medium term rally and Felix suspect gold will peak at the 3000-3400 area. BOA global fund manager survey shows that the most bullish trade is gold. We might correct to 2600-2700.
38. USD role as a reserve currency is badly affected by these geopolitical shifts. Trades might eventually be settled in other currency.

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