March 2, 2025

QuickTakes

MARKET CALL:

Riding A Bucking Bull

In recent weeks, many news headlines have suggested that the US economy is tanking and that so is the Old World Order. So investors are jittery, and a risk-off investment style is back in favor relative to a risk-on posture. They are questioning whether Trump 2.0 might depress the economy before stimulating it because higher tariffs, deportations, and federal job cuts are occurring before tax cuts, deregulation, and lower oil prices. They are wondering whether President Donald Trump's New World Order will be more or less stable than the old one. They were shaken by Friday's shouting match in the Oval Office.

It all adds up to lots of uncertainty that is offsetting some of the animal spirits that were unleashed when Trump was elected for a second term. Most of the stock market gains following Election Day have been pared so far this year, especially those of the Magnificent-7 and the Russell 2000 (chart). Interestingly, the S&P 500 managed to rise 6.2% since Election Day to a new record high on February 19, but it is now down 3.1% since then and up just 3.0% since Election Day.

The Nasdaq Composite has been struggling to climb above 20,000 to a new record high since late last year (chart). In recent days, it gave up the effort and dropped back down to 18,847, just slightly above its 200-day moving average.

The defensive sectors of the S&P 1500 have mostly outperformed the cyclical sectors so far this year (chart). LargeCaps have outperformed SmallCaps and MidCaps so far this year.

So where do we go from here?

We think that the S&P 500 may remain choppy through mid-year before resuming its climb to new record highs on better-than-expected economic and earnings growth during the second half of this year. In coming days, we expect to see some of that strength in February's batch of economic indicators, particularly employment and retail sales, both of which were depressed during January by bitterly cold weather and the fires around Los Angeles. However, that good news could be offset by more uncertainty about Trump 2.0. Furthermore, the recent jump in initial unemployment may persist for a few weeks as the DOGE Boys continue to fire government workers.

The good news is that S&P 500 companies’ earnings growth beat analysts' consensus expectations during all four quarters of 2024 (chart). We expect more of the same in 2025. The Q4-2024 earnings reporting season is almost over. At the start of the season, analysts expected an 8% y/y gain. It's likely to be closer to 14%.

We bet on the resilience of the economy and earnings during the past three years when the Fed tightened monetary policy and when geopolitical risks were heightened by the Russia-Ukraine war and the war in the Middle East. Riding the bull market since October 2022 hasn't been easy, but we aren't ready to jump off the bull and hope we don't get thrown off. We are still targeting 7000 on the S&P 500 and 22,000 on the Nasdaq by the end of this year.

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