3 Market Predictions For June

Despite a strong May for equities with the S&P 500 up 6.2% and the Nasdaq rising 9.6%, concerns are rising about commercial real estate, particularly office CMBS delinquency rates which are nearing Great Financial Crisis peaks, driven by Class B and C properties. The author predicts office CMBS delinquency rates will surpass GFC levels in June, negatively impacting regional banks and office REITs, and anticipates a market pullback with the S&P 500 and Nasdaq giving back at least half of May's gains due to overvaluation and weakening earnings growth. Amidst these concerns, the author forecasts gold will resume its upward trend in June, driven by rising U.S. debt levels and global debt concerns.

Analysis

Despite a robust May for equity markets, where the S&P 500 (SP500) appreciated 6.2% and the Nasdaq (COMP:IND) surged 9.6%, significant underlying headwinds are forecast for June. A primary concern is the deteriorating commercial real estate (CRE) sector, with overall Commercial Mortgage-Backed Securities (CMBS) delinquency rates consistently rising since 2023 and ticking up again in May. Office CMBS delinquency rates, now at 10.59%, are rapidly approaching the 10.7% peak seen during the Great Financial Crisis, exacerbated by a record office vacancy rate of 22.6% in Q1 2024, more than double pre-pandemic levels. This distress is concentrated in Class B and Class C older buildings, as new Class A space remains relatively stable; however, conversions to residential use are expected for less than 10% of troubled square footage due to financial unviability. It is predicted that June's CMBS delinquency data for office properties will surpass GFC highs, impacting regional banks' earnings (though likely manageable) and significantly pressuring office REITs with lower-quality portfolios, such as Vornado Realty Trust (VNO), which holds higher quality assets and is expected to better navigate the downturn. Concurrently, equity markets appear vulnerable to a pullback. The S&P 500 trades at approximately 28 times trailing earnings with a yield of just over 1.2%, starkly contrasting with the 4.4% yield on the 10-Year Treasury (US10Y). Valuation metrics like Price to Sales and Market Cap to U.S. GDP ratios are reportedly higher than at the end of the Internet Boom, and with a PEG ratio exceeding three based on trailing earnings (assuming nearly 7.5% S&P 500 earnings growth in 2025), and projected slowdowns in year-over-year earnings, a correction is anticipated. Tariffs are also expected to negatively impact profit margins for most companies, leading to downward earnings revisions, although domestic steel producers like Nucor (NUE) may benefit. Consequently, the S&P 500 and Nasdaq are forecast to relinquish at least half of their May gains. In contrast, gold (XAUUSD:CUR), after a slight consolidation in May (down less than 0.2%) following a roughly 40% rise over the past year, is projected to resume its upward trajectory. This outlook is supported by escalating U.S. federal debt (approaching $37 trillion), a $1.83 trillion federal deficit in FY2024, substantial debt service costs ($279 billion in Q1), and Moody's recent downgrade of U.S. debt. Proposed tax reforms adding an estimated $4 trillion to the national debt from 2025-2034, alongside rising global debt in Japan and China (debt-to-GDP surpassing 300%), further bolster the case for gold.

Key Decisions for Investors

• Investors should consider adopting a cautious stance towards broad equity markets in June, potentially reducing exposure to indices like the S&P 500 and Nasdaq given overvaluation concerns and the prediction of a significant pullback.
• Exercise heightened scrutiny in the commercial real estate sector, particularly avoiding or reducing exposure to office REITs with significant Class B and Class C assets, while monitoring regional banks for increased loan loss provisions related to CRE; REITs focused on Class A properties, like Vornado Realty Trust (VNO), may offer relative resilience.
• Evaluate increasing allocations to gold (XAUUSD:CUR) as a potential hedge against rising sovereign debt levels, persistent inflation, and anticipated market volatility, given its projected resumption of gains.
• Closely monitor the upcoming June office CMBS delinquency rate data from Trepp, as a breach of Great Financial Crisis levels could be a catalyst for broader market re-pricing of CRE risk and impact related financial instruments.
• Re-assess earnings outlooks for portfolio companies, particularly those susceptible to tariff impacts or reliant on robust economic growth, as downward revisions are anticipated across many industries, while identifying potential beneficiaries of protectionist policies such as domestic steel producers.