Week of February 24, 2025
Diverging Market Dynamics. The S&P 500 declined 1.6% last week due to a variety of concerns and uncertainties: recent slower economic data, unknown tariff implications, delayed tax cuts, government layoffs, and a potential government shutdown. To put it into perspective, however, the S&P 500 hit record highs on Tuesday and Wednesday, and the slower economic growth still points to a healthy 2.3% GDP growth rate, which remains above trend (trend is 1.5%). In a 2% growth world, earnings can still grow 7-10%, and the momentum in earnings has been clear: 86% of S&P 500 constituents have reported Q4 results, and the current Q4 blended earnings growth rate is 17.29%, well above estimates. Earnings are expanding across multiple sectors, and as a result, market participation has broadened. Health care, communication services, energy, and utilities are all leading the market and are up over 6% year-to-date. Utilities was the top-performing sector last week, gaining 1.39%, and technology is flat on the year.
The consumer remains steady, supported by continued low initial jobless claims, mid-single-digit wage growth, and disinflation. Manufacturing is another positive point, as onshoring and reshoring continue to be a tailwind in our industrial economy. But markets are in the midst of digesting many crosscurrents. Trump 2.0 policies are still being discussed with a large question mark around tariffs. A return of inflation, less than expected GDP growth, and the combined effect on corporate profits are on the minds of investors. We are watching the labor market for any signs of cracks that may impact U.S. consumers – so far there are none. Initial jobless claims continue to come in below long-term averages and retail sales are still robust, up 4% y/y. As long as the labor market remains balanced with no sharp rise in inflation, we believe the U.S. consumer will remain healthy – which is 70% of the U.S. economy.
Chart 1: Earnings Are Surprising to the Upside Across Every Sector This Quarter[1]
Housing, still a Favorite Theme? Housing continues to face pressure amid record-high home prices and 7% mortgage rates. Housing-related stocks like D.R. Hortin (DHI), Lennar Corporation (LEN), and Toll Brothers (TOL) are all down nearly 25% over the last three months. January’s existing home sales came in below expectations, and housing starts declined 9% m/m. Housing is feeling the pressure of a grid-locked market with record-low affordability. But that said, we still believe in the long-term theme of the U.S. housing market. The U.S. economy is 5 million homes short, and homebuilders continue to underproduce new production with 15 consecutive years of underproduction. We are seeing some relief in long-term yields, which will support a decline in mortgage rates. The Trump administration is adamant about lowering interest rates, especially in the long end, through decreasing government spending. It is hard to gauge what effect the Department of Government Efficiency will have on growth and the economy, but the new administration is focused on improving the health of the country over the long term, which should benefit housing. Lower rates will assist in housing affordability which will open the market, and we believe low to sub 6% mortgage rates will bring a rise in demand.
Chart 2: Existing Home Sales Rose Towards the End of 2024 After Mortgage Rates Declined in September[2]
Fixed Income. U.S. Treasury yields ended the week lower across the curve as economic data showed the services sector contracted for the first time since January 2023 with consumer sentiment weakening more than expected. Long-run inflation expectations rose to 3.5%, the highest since 1995.
Credit spreads widened across investment grade and high yield last week, increasing 3 bps to +114 bps for investment grade and 14 bps to +319 bps for high yield. For the fifth week in a row, credit ratings deteriorated as the main rating agencies issued 25 downgrades and 17 upgrades. Tax-exempt yields followed Treasuries lower rallying 1-4 bps across the curve.
The Week Ahead.
Earnings – Monday: DPZ, SBAC; Tuesday: AMT, AXON, CTRA, CZR, FANG, FSLR, HR, HSIC, INTU, KDP, KEYS, O, OKE, PEG, PNW, PSA, SRE, WDAY; Wednesday: A, CRM, EBAY, EXR, LOW, NRG, NVDA, PARA, SNPS, TJX, VRSK; Thursday: ADSK, APA, DELL, EIX, EVRG, FE, HPQ, HRL, INVH, NCLH, NTAP, SJM, SOLV, TFX, UHS, VST, VTRS, WBD; Friday: AES, EOG, ERIE, MOS.
Economics – Tuesday: FHFA Home Price Index, Consumer Confidence; Wednesday: Building Permits; Thursday: Continuing Jobless Claims, Q4 GDP (Second Preliminary), Initial Claims, Pending Home Sales; Friday: PCE.
Return for Selected Indices[3]
[1] Source: FactSet. As of January 21, 2025.
[2] Source: FactSet. As of February 24, 2025.
[3] Source: Bloomberg. As of February 24, 2025.
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