January 20, 2025

QuickTakes

MARKET CALL: Momentum Is Hard To Stop

The bond and stock markets were closed today for MLK Day. When they reopen tomorrow, we will all be able to assess their initial reactions to Trump 2.0 following today's Inauguration ceremony. The major stock market futures indexes were up all day. Bitcoin soared in the morning, but turned down in the afternoon. Gold and copper prices fell slightly.

The dollar sold off after The Wall Street Journal reported that Trump isn't rushing to implement new tariffs. Instead, he plans to send a memo to federal agencies directing them to evaluate trade policies and economic relationships with China, Mexico, and Canada.

In other words, there might not be much of a shock-and-awe effect on the markets from Trump 2.0 initially since most of it has been discussed by Trump during his campaign speeches. Instead, the markets might continue to focus on Fedspeak and the latest earnings reporting season. Both were bullish last week. Last Thursday, in a CNBC interview, Fed Governor Christopher Waller was dovish. Waller's comments pushed bond yields down, as did the recent batch of lower-than-expected inflation reports (chart).

Also last Thursday, the big banks reported better-than-expected earnings for Q4-2024. Collectively, analysts now expect S&P 500 earnings to rise 9.1% y/y for the quarter, up from their previous estimate of 8.2% (chart). We are raising our Q4 earnings growth estimate from 10.0% to 12.0% y/y. We had thought it would be a strong earnings reporting season. Now we think it will be even stronger.

The S&P 500's bull market has been momentum driven since early 2023, led by LargeCap Growth stocks, especially the Magnificent-7 (chart). Today, Stanley Druckenmiller said on CNBC that Donald Trump’s re-election renewed a jolt of speculative enthusiasm within the markets and surging optimism within businesses. He said that he is a "believer in animal spirits."

While the stock market has been quite volatile so far this year, there are still some signs suggesting that the rally is broadening among the S&P 1500 sector indexes, with the MidCap and SmallCap (a.k.a. “SMidCap”) sectors outperforming the LargeCap sectors on balance (chart).

We may have to reconsider our lukewarm opinion on the SMidCaps. They are outperforming the LargeCaps so far this year (chart). Animal spirits have a tendency to spread.

The Russell 2000 seems to have found support at its 200-day moving average (chart). It may soon rise to a new record high.

Last week's batch of good news included a stronger-than-expected 5.4% (saar) increase in China's real GDP during Q4. The Chinese government is providing fiscal stimulus to boost the Chinese economy. Nevertheless, we expect it will stay relatively weak, and that should reverse the recent rebounds in the prices of copper and oil (chart). China could use more animal spirits.

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