03/10/2025 Market Strategy
Rock Steady
Challenging Times Often Offer Good Investment Opportunities
Key Takeaways
- With 99% of the firms in the S&P 500 index having reported, results exceeded expectations for the Q4 season with earnings rising 13.5% from a year earlier on 5.3% revenue growth. Before the season began, Bloomberg put analysts’ expected earnings growth at 7.3%.
- Among the sectors, nine are seeing earnings growth, with seven at double-digit rates. Two sectors are seeing earnings declines, with one (energy) at double-digit rates.
- Last week’s economic data showed resilience in the US labor market as nonfarm payrolls posted a gain of 151,000 workers while monthly hourly earnings growth slowed. The ISM surveys of business confidence showed an uptick in activity among services firms while manufacturers continue to face challenges from a relatively strong US dollar.
- This week brings the first readings on inflation with the CPI and PPI reports due midweek as well as the preliminary read on consumer confidence from the Michigan survey
With Q4 earnings season for the S&P 500 nearly completed, the ISM indexes (manufacturing and services) and the jobs and unemployment numbers for February reported last week, market participants will find focus on the consumer and producer price reports to be released this week on Wednesday and Thursday.
With just five companies left to report in the S&P 500’s Q4 earnings season, nine sectors have delivered positive earnings results in the period. Seven sectors have delivered double-digit earnings growth including: communications services (30.6%), consumer discretionary (25.6%), financials (21.7%), information technology (18.2%), real estate (14.9%), utilities (14.8), and health care (13.4%).
Just two sectors have shown negative earnings growth with one of the two, energy, showing a double-digit decline in earnings (-21.6%).
Any developments tied to the pending tariff regimes by the Trump administration and any progress made on the budget as Congress deliberates and cooler heads look to avoid a government shutdown will also garner plenty of trader and investor attention.
Increased levels of concern tied to tariff risk have been particularly vexing for stocks stateside over the course of the last few weeks with little progress towards any resolution seen so far.
Economists, whether from the Fed or from the private sector, are raising concern about the potential effects of tariffs on the US economy and its trading partners and elevating nervousness in the day to day activity in the markets particularly in the US.
Ironically, since the beginning of the year, foreign markets around the world and particularly in Europe are outperforming the US equity markets as the world frets over the potential effects of tariffs should they be broadly deployed by the Trump Administration.
We see some irony in the recent outperformance by foreign markets over the US markets. In our view, foreign companies in Europe, Asia, and Latin America are likely to suffer even more from deployment of tariffs than companies in the US.
Looking around the world, the capacity to produce goods destined for export to the US has increased to such an extent over the last two decades to suggest that not only China but much if not most of the rest of the exporting world is currently suffering from overcapacity of goods destined for US consumption.
China’s domestic economy has not yet grown enough to replace US demand already lost in the recent worldwide diversification away from a one country global supply chain to a more diversified supply chain across the globe. Tariffs would likely only exacerbate the situation for China as well as for other countries suffering from over capacity of export-driven production.
We expect more is likely to be revealed over the course of the next few weeks as to the effect of tariffs by the US as well as from any retaliatory tariffs that are levied. We would expect that cooler heads could prevail as all sides consider the effects on both producers and consumers.
Beyond tariffs, there’s a long list of budget related items for Congress and the Administration to address, such as some kind of resolution to the war in Ukraine and more to consider.
At times like these, we recall that in hindsight challenging times are often the best for identifying investment opportunities as well as recognizing risks that lie close at hand.
Prudent diversification, patience, and an eye for “babies that get tossed out with the bathwater” in market pullbacks remain central to our thinking.
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