February 23, 2025

QuickTakes

MARKET CALL: Still In Choppy Waters

Or Going Over A Waterfall?

Our answer to the title's question is that the stock market is still in choppy waters. Admittedly, it felt more like a waterfall on Thursday and Friday. However, the S&P 500 was down only 2.1% and that was from a record high on Wednesday (chart). Our hunch is that sentiment turned very bearish very quickly at the end of last week because investors aren't as sure about the economy's resilience as we are. We remain impressed that it grew over the past three years notwithstanding a significant tightening of monetary policy, a mini-banking crisis, and lots of geopolitical turmoil. We continue to place our bets on its resilience.

We expect that Nvidia's earnings report, coming Wednesday after the close of trading, will be stronger than expected, providing a boost to the market (chart). We expect to hear guidance that DeepSeek won't kill spending on AI infrastructure, including datacenters. Elon Musk's xAI project utilized 200,000 Nvidia H100 GPUs. The main risk is that Nvidia will announce yet another delay in its highly anticipated Blackwell GPU, which was first announced in March 2024.

We also expect that February's consumer confidence report on Tuesday and Thursday's weekly jobless claims will confirm that the labor market remains strong. That should relieve some of the concerns about the resilience of the consumer following the weather-related weakness in January's retail sales and the odd drop into contraction territory in February's NM-PMI compiled by S&P Global (chart). We expect that the similar index compiled by the Institute for Supply Management will show that services industries are still expanding, when it is reported in early March.

At the start of the Q4-2024 earnings reporting season, industry analysts were estimating an 8.0% increase in S&P 500 companies’ aggregate earnings per share (EPS). As of the February 20 week, the increase is close to 13% (chart). The analysts are currently estimating EPS of $245.85 for 2024, $270.64 in 2025, and $308.44 in 2026. Those are bullish projections, but ours are more so at $285 and $320 in 2025 and 2026 because we are expecting productivity growth to boost profit margins.

We are encouraged to see that the percent of S&P 500 companies with positive 12-month percent changes in forward earnings has increased from 56% during April 2023 to 76% currently (chart). That supports our view that the rally in the S&P 500 should broaden out from the Magnificent-7 to the S&P 493.

Since late last July, the percent of companies outperforming the S&P 500 on a y/y basis has increased from 26% to 45% currently (chart). That's another healthy development.

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