Good News is Good News

By Alexandria | Hightower on January 14, 2025

Week of January 13, 2025

Market-Moving Data. Friday’s blowout non-farm payroll report for December moved markets; the S&P 500 fell -1.50%, the Nasdaq fell -1.60%, and the 2-year and 10-year Treasury yields hit their highest levels since October 2024 and November 2023, respectively. The report showed 256K new jobs were added in the month, far exceeding the consensus, which was looking for 150-160K. Also, within the report, the unemployment rate fell to 4.1%. Interest rate cut probabilities moved lower following the data, with now just 28 basis points (bps) worth of cuts priced in for 2025, a little more than one cut from the Fed.

When stocks fall and yields rise following good economic data, market pundits will say “Good news is bad news”. The phrase relates to strong economic growth negatively affecting markets through the Fed likely cutting less than expected and inflation possibly entering back into the economy. We dislike this ideology and think good economic news is good news for markets and the economy. A solid jobs number, like we had last week, means that the economy is doing better than expected. Companies are hiring workers, and the unemployment rate is declining. Especially in the private sector – private companies hired 223K new workers last month, well exceeding estimates of 140K. A stronger economy and labor market means better corporate earnings, and as we know, stocks follow profits. We have stated many times now that we would prefer higher growth, along with higher inflation, with the opposite being lower growth and lower inflation. The difference is the former goes along with higher corporate earnings, which drives the stock market. We expect the Fed to cut less than expected in 2025 given robust economic data and a healthy consumer.

Chart 1: Stocks are Slightly Down to Start 2025[1]

2025: The Year of M&A? Mergers and acquisitions (M&A) were in the news last week, and it appears that the market is getting ready to flip what has been a muted dealmaking environment for much of the past two years. Just last week, Constellation Energy (CEG) agreed to buy private energy company Calpine, Stryker (SYK) agreed to acquire Inari Medical (NARI), and Shutterstock (SSTK) agreed to merge with Getty Images (GETY). We also learned this morning that Eli Lilly (LLY) plans to acquire Scorpion Therapeutics’ mutant-selective inhibitor program, which could potentially address 30-40% of people with hormone-positive breast cancer. Additionally, Smithfield Foods filed for an initial public offering (IPO). Smithfield Foods is the world’s largest pork producer, and the IPO may be worth more than $1 billion. Bloomberg has reported that at least nine companies which may raise north of $1 billion through an IPO are targeting to come public in 2025.[2] 2024 U.S. IPO volumes rose 60% relative to 2023 but remain well below pre-pandemic levels. With a more favorable rate and regulatory environment in 2025, we believe dealmaking will enter back into the market.

Chart 2: Many Well-Established Companies Are Planning to Go Public in 2025[3]

Fixed Income. U.S. Treasuries sold off last week as stronger-than-expected economic data further derailed rate cut expectations; there is now only a 15% probability of two cuts vs 73% to begin the year. The 2-, 10-, and 30-year yields rose by 10, 16, & 14 bps, respectively, levels last seen in July 2024 and October 2023. We are looking at the bond market and the 10-year Treasury yield as it approaches 5%, which equities will not like as it means fixed income becomes more competitive.

Credit spreads widened across Investment Grade and High Yield last week increasing 2 bps to +121 bps and 6 bps to +314 bps, respectively. After the first week of positive rating improvements since November, credit ratings deteriorated last week as the main rating agencies issued 19 downgrades and 11 upgrades. Tax-exempt bonds followed Treasuries, with yields rising 6-8 bps across the curve. The new issue calendar is back to full speed, with $13.8 billion scheduled for this week.

The Week Ahead.

Earnings – Wednesday: BK, BLK, C, GS, JPM, WFC; Thursday: BAC, JBHT, MS, MTB, PNC, UNH, USB; Friday: CFG, FAST, HBAN, RF, SLB, STT, TFC.

Economics – Tuesday: NFIB Small Business Index, Producer Price Index; Wednesday: Consumer Price Index, Hourly Earnings; Thursday: Continuing Jobless Claims, Export Prices, Import Prices, Initial Claims, Retail Sales, Business Inventories, NAHB Housing Market Index; Friday: Building Permits, Housing Completions, Housing Starts, Capacity Utilization, Industrial Utilization, Manufacturing Utilization.

Stephanie Link’s TV Schedule:

Return for Selected Indices^[4]

[1] Source: FactSet. As of January 10, 2025.

[2] Source: Bloomberg. As of January 7, 2025.

[3] Source: Bloomberg. As of January 7, 2025.

[4] Source: Bloomberg. As of January 13, 2025.