Executive summary
This week we look at three critical issues:
- Delayed Fed pivot deepens US commercial real estate crisis. While commercial real estate has a few bright spots – notably logistics and data centers – the office segment shows no signs of recovery, especially in the US (down -24% in nominal terms from mid-2022 peak), hit by the double whammy of structurally lower occupancy and the increase in interest rates. In principle, the delay in Fed cuts has a minor effect on valuations as long as terminal rates are not adjusted upwards. But in practice, early cuts would alleviate the dire situation of the sector, boosting investor confidence and allowing the return of leverage, besides reducing the risks of potential cross-effects from other downbeat assets. The big concern is the looming CRE debt maturity wall: 2024 is a critical year, with USD1trn of CRE debt to be refinanced. According to CBRE estimates, the office segment will face the highest debt-funding gap, with refinancing needs amounting to USD112.8bn between 2023 and 2026. We expect the fall in prices to continue at a slower pace and bottom out (-30% peak-to-trough) in the second half of the year in the case of a “benign delay” but it could be much deeper (beyond -40%) if terminal rates increase or if the delayed pivot causes further economic damage.
- Oil markets: Supply, geopolitics and the Fed are taking turns in the driving seat. The upcoming OPEC+ meeting on 01 June is unlikely to deliver a major surprise as we expect current supply curbs to be maintained. Oil prices have been on a roller coaster lately, breaching the 90 USD/bbl threshold in early April due to rising geopolitical tensions in the Middle East before falling back to around 82 USD/bbl recently on the back of concerns over demand and Fed policy rates. Looking ahead, we forecast oil prices to average 84 USD/bbl in 2024 before consolidating slightly to an average of 81 USD/bbl in 2025.
- Q1 earnings: the return of corporate optimism. S&P 500 companies have continued to outperform expectations, leading to the highest year-over-year earnings growth since Q2 2022. Despite mixed guidance for the next quarter, analysts still project +11% earnings growth for 2024. In Europe, results are less optimistic but show signs of improvement, with positive momentum suggesting +5% earnings growth for 2024 will be feasible. Despite these encouraging signs, the current market reactivity and earnings concentration indicate elevated risks centered around a few companies and high valuations, potentially leading to asymmetric negative reactions to bad news.