By Ben Norris, CFA, Senior Investment Strategist, Vice President
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The Martin Luther King Jr. holiday meant markets were closed on Monday, but that didn’t make the week any less eventful for investors. Tuesday marked a strong start to the week and a continuation of the prior week’s momentum. It was a quiet day for economic news and data, but the fourth-quarter earnings season continued to show that corporations are seeing relatively strong financial results. The S&P 500 (SPX) gained 0.9% on broad-based participation and leadership coming from the industrials and real estate sectors. Small-cap stocks continued their rally, gaining more than 1.5%, as investors are becoming more comfortable adding risk in 2025.
Stocks once again closed higher on Wednesday on the back of strength in mega-cap technology stocks. SPX gained another 0.6%, while the technology-heavy NASDAQ Composite (COMP) rose 1.3%. Much of Wednesday’s gain was attributed to the announcement of a joint venture between Oracle, OpenAI and Japanese conglomerate Softbank, where the companies pledged to invest $500 billion in artificial intelligence technology over the next several years. The technology sector was the strongest-performing sector in response to the news. In economic news, the Conference Board’s Leading Economic Index (LEI) showed a decline in economic momentum to end 2024, despite a surge in the prior month tied to the election of President Trump. Low consumer confidence, weak manufacturing, increasing unemployment claims and a decline in housing activity all contributed to the weak reading. The LEI had been weak for the better part of two years, but trends have improved recently, and the index is no longer signaling an elevated risk of economic recession. The Conference Board’s release went on to say that it expects growth momentum to remain strong to start 2025 and U.S. real GDP to grow by 2.3% this year.
SPX closed at a new record high on Thursday despite technology stocks lagging the broader market. The price of crude oil came under pressure as President Trump said he would push OPEC to lower prices. Despite this, energy stocks managed to finish the day slightly higher, likely because the group saw a significant sell-off the day prior. Initial jobless claims ticked higher week over week, partially due to the wildfires in California, but remain at a comfortably low level relative to history. Employment data remains in focus as investors work to parse out what the U.S. Federal Reserve (Fed) will do with interest rates in 2025. Any significant weakness in labor markets paired with stubborn inflation could cause the Fed to lower interest rates more than markets anticipate.
Technology stocks led the market lower on Friday, but the damage wasn’t enough to undo the progress made earlier in the week as SPX closed higher for the second week in a row. SPX gained 1.8%, while the Dow Jones Industrial Average (DJIA) and COMP rose 2.2% and 1.7%, respectively. Year-to-date, domestic equity markets have seen a broadening out of participation with value and small- and mid-cap indexes performing better than their growth and large-cap counterparts. Through the end of last week, DJIA has gained 4.5%, besting the 3.8% and 3.3% gains of more technology-heavy SPX and COMP. Similarly, the Russell 1000 Value and Russell Mid Cap are the best-performing major indexes with gains of 4.8% and 4.9%. The Manufacturing and Services Purchasing Managers’ Indices both indicated expanding activity in January based on data released Friday. Services PMI came in below expectations but still indicated a comfortable level of expansion. Manufacturing PMI, which has indicated that manufacturing activity has been in contraction for every month but one since November 2022 returned to expansion territory in January, coming in above expectations. Expansion in both services and manufacturing activity comes as U.S. businesses grow increasingly optimistic that the economy is poised to see breakout growth in the year ahead on the back of the Trump administration’s promised pro-business policies.
Although we’re in the early innings, the fourth-quarter earnings season is off to a strong start. Just 16% of companies in SPX have reported results so far, but 80% have reported earnings that were better than estimates. This is better than the long-term average rate of earnings exceeding expectations, which hovers around the mid-70% range. Over the past week, strong earnings from financial stocks were the largest contributors to the upside compared to estimates. On the other hand, disappointing results from stocks in the energy sector have been a headwind to overall earnings trends. Consensus expectations predict 12.7% growth in fourth-quarter earnings, which would take full-year 2024 earnings growth near 10% on revenue growth of nearly 5%. For 2025, analysts are currently projecting full-year revenue and earnings growth of 5.9% and 14.8%, which would mark impressive acceleration following a strong 2024.
Last week also saw the inauguration of Donald Trump as the 47th President of the United States. President Trump wasted no time as he began to implement various policies spanning immigration, trade, investment in artificial intelligence and saving a popular social media app to name a few. One of the most closely watched areas of Trump policy for investors has been and will likely remain trade and tariffs. During his campaign, Trump promised that he would impose 25% tariffs on both Mexico and Canada. As with most Trump campaign talking points, this wasn’t a literal promise but rather a signal of what sort of policy he and his team would explore while relying on a headline-grabbing number to create leverage in future negotiations. While tariffs on our two neighbors are to be determined, it does appear that tariffs on Chinese goods are imminent. Chinese markets came under pressure last week as Trump suggested that a 10% tariff on Chinese goods could be put in place as soon as February 1. Elsewhere, Colombia drew the ire of Trump after refusing to accept a military transport of deported immigrants coming from the United States. Trump quickly responded to Colombia’s refusal by threatening steep tariffs on all Colombian goods.
Tariffs appear to be the favored tool in the Trump administration’s trade tool kit, so it may be helpful to level-set on how tariffs work. Tariffs function as taxes on imported goods, which are paid by the importers of goods, not the exporting countries. This often means, that importers pass those tariff costs on to consumers in the form of higher prices. However, tariffs can put pressure on foreign governments to come to the negotiating table to avoid U.S. importers looking to other countries or domestic sources to substitute for now higher-priced goods. Trump’s idea here is essentially “America first.” Either U.S. businesses will be forced to reinvest in domestic manufacturing, or international trade partners will have to agree to certain concessions that Trump sees as favorable to America. Economists generally believe that tariffs fell out of favor in the early 20th century for a reason. Tariffs don’t generate substantial revenue, especially for a service-focused economy like the United States, and they can often create retaliation leading to offsetting effects. The second Trump administration looks poised to more aggressively pursue its policy goals after learning from Trump’s first term. While the ultimate effect of tariffs remains uncertain, a targeted approach to trade policy will likely be better for the economy and for markets than a shotgun blast of tariffs across the global economy.
Looking to this week, the Fed’s January policy meeting will be a primary focus. Since the Fed began its rate-cutting cycle in September of last year, the 10-year U.S. Treasury yield has risen by nearly 1%. The move in rates has been driven by a combination of factors, including higher inflation expectations, strong economic growth and uncertain fiscal policy. The market expects just a single 0.25% rate cut from the Fed this year, down significantly from the four cuts expected just a few months ago. When Fed Chair Powell gives his press conference on Wednesday, investors will be looking for clues about how Fed policymakers are planning to respond to Trump’s aggressive trade policy. The coming week will conclude with a reading of the Fed’s preferred measure of inflation. Consensus expectations are for a 2.6% year-over-year increase in headline inflation, still above the Fed’s 2.0% long-term target, but trending in the right direction.
| TIME (ET) | REPORT | PERIOD | MEDIAN FORECAST | PREVIOUS |
| MONDAY, JAN. 27 | ||||
| 10:00 am | New Home Sales | Dec. | 671,000 | 664,000 |
| TUESDAY, JAN. 28 | ||||
| 9:00 am | ||||
| S&P Case-Shiller Home Price Index | Nov. | — | 4.2% | |
| Durable Goods Orders | Dec. | 0.7% | -1.1% | |
| Consumer Confidence | Jan. | 106.3 | 104.7 | |
| WED., JAN. 29 | ||||
| FOMC Interest-Rate Decision | ||||
| Fed Chair Powell Press Conference | ||||
| THURSDAY, JAN. 30 | ||||
| U.S. Gross Domestic Product | Q4 | 2.5% | 3.1% | |
| Initial Jobless Claims | Jan. 25 | 225,000 | 223,000 | |
| Pending Home Sales | Dec. | 1.0% | 2.2% | |
| FRIDAY, JAN. 31 | ||||
| Employment Cost Index | Q4 | 0.9% | 0.8% | |
| Personal Income | Dec. | 0.4% | 0.3% | |
| Personal Spending | Dec. | 0.5% | 0.4% | |
| PCE Price Index (y/y) | Dec. | 2.6% | 2.4% | |
| Core PCE (y/y) | Dec. | 2.8% | 2.8% |
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market