01/27/2025 Market Strategy
The River Is Wide
Investor Appetite for Riskier Assets Is Broadening Returns Across Market Capitalizations and Styles
Key Takeaways
- With 78 or 16% of the firms in the S&P 500 index having reported, early indications look promising for the Q4 season, with earnings up 16.6% so far on revenue growth of 4.7%.
- Among the sectors at this still-early stage in the season, eight are seeing earnings growth, with four at double-digit rates. Just three sectors are seeing earnings declines.
- This week 104 more firms are scheduled to report including financial firms as well as major names in technology and consumer discretionary. Another 134 firms report the week after.
- This week also brings the first report on GDP growth in the fourth quarter of last year. Bloomberg’s consensus median estimate is for a 2.7% annualized gain.
The sector performance of the S&P 500 in the year to date as well as the performance thus far of other widely tracked equity benchmarks in the same period suggest to us a broadening in investor appetite for diversification among stocks.
While it is too early in the year to suggest this trend will continue, it is worth noting as it counters a view that frequently prevails on a day to day basis in more than a few market commentaries that seem too often to suggest that the technology sector is the only thing that moves stocks higher.
From the start of the year through its close last Friday, the S&P 500 is up 3.7%. Six of its sectors have outperformed the underlying benchmark in the period with industrials, communications services, energy, materials, financials, and health care up respectively: 7.0%, 6.2%, 6.0%, 5.75%, 5.11%, and 4.8% in the same period.
Of the four sectors to underperform the bench mark so far this year, three have posted positive gains with consumer discretionary, real estate, and information technology respectively higher: 3.5%, 2.0%, and 1.7%.
Consumer staples, considered one of the more defensive sectors (less sensitive to economic cycles), is essentially flat with a negative bias, down 0.04% through last Friday.
Results thus far in Q4 S&P 500 earnings season have surprised to the upside, though with just 78 or 16.5% of the S&P 500’s companies having reported it is too early to tell what the final tallies of this earnings season will look like.
That said, so far four sectors are showing double-digit earnings growth with a total of eight sectors showing positive earnings growth. Of the three sectors showing negative earnings growth, two are showing double-digit negative earnings growth.
A glance at the performance of widely tracked equity benchmarks stateside across market capitalizations shows a broadening of performance with the Dow Jones Industrials (the Dow 30), the S&P 500, The NASDAQ Composite, the S&P 400 (mid-caps), the S&P 600 (small caps), and the Russell 2000 (small caps) respectively higher year to date: 4.4%, 3.7%, 3.3%, 4.9%, 3.4% and 3.5%.
International global stock benchmarks also point at this early date in the New Year to a broadening appetite for equities with the MSCI EAFE (developed international markets ex-US and Canada), MSCI Emerging Markets and MSCI Frontier markets posting gains priced in US dollars from the start of this year through the close last Friday of 4.4%, 1.4%, and 3.3%.
The Economy Chugs Along
Economic data stateside has continued to show resilience in key areas that track inflation, job growth, wages, business, and the consumer with the Fed having begun to cut its benchmark rate last year (September, November, and December respectively by 50 basis points, 25 basis points, and 25 basis points). The Fed continues to maintain vigilance against inflation which remains somewhat sticky even as it has come down from over 9% nearly three years ago to around 2.8% to 3.5% now (depending on the gauge or index used).
Other than the resilience evident in stateside economic activity, the fact that the Fed has been able to avoid pushing the economy into a recession ----nearly three years from when it entered a tightening cycle in March of 2022 through September of last year, suggests marked progress against inflation even as the Fed’s 2% target remains elusive.
In our view, the Fed’s sensitivity throughout the tightening cycle into the beginning of rate cuts in the fourth quarter of last year remains a hallmark of a Fed that places importance on its dual mandate of an interest rate policy that fosters economic growth without untoward levels of inflation while maintaining a goal of what’s defined as “full employment” (unemployment in a range of 3-4%) in the workforce.
The Week Ahead
This week investors will have a broad range of economic data to ponder including indicators of inflation, employment, unemployment, housing, manufacturing, services, GDP, home prices, and consumer confidence. On Wednesday the Fed FOMC announces its rate decision.
In addition to the aforementioned of course will be investor focus on developments in Washington DC as the new administration sets the course of a long list of objectives tied to both domestic and global policies. In addition, Congressional votes on proposed cabinet nominees will be watched and parsed.
We remain positive on equity markets stateside with fixed income looking complementary for portfolio diversification and current income.
While it is often said that “markets don’t like volatility” we can’t help but think of the opportunities that arise for traders when “vol” picks up as well as for intermediate- to longterm investors when “babies get thrown out with the bathwater” in market downdrafts.
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