Investment Insights

 — Steve Orr 

Reality is better

• Stocks in consolidation — typical this time of year. Bull remains in place.
• Earnings solid, 2025 growth marked lower.
• Bonds trapped in a trading range — waiting on tariffs, inflation.
• Fed on hold; do not expect another change in rates until end of summer

Back to

Reality for portfolios is the market value at the bottom of the statement. How does one get there? Add up the current values, dividends earned and interest received. That’s as close to reality as one can get. Why not actual? Because when you go to sell a lease, bond or stock, you are not always going to get that price listed on the statement from the end of last month. 

Stock values in a portfolio are the output of investor hopes, management’s decisions and earnings. We confess we cannot control any of those variables. Thanks to accounting rules, however, earnings are fairly close to reality. 

Over half

The fourth quarter reporting season is over half done. Through Friday, 62% of the S&P 500 members had reported. As a group, 77% of the reporters beat their earnings estimates and 63% beat revenue estimates. Compared to the fourth quarter of 2023, earnings last quarter are growing at a 16% clip. According to FactSet, that growth rate is well ahead of the year-end estimate of 11.8%. We confess that we thought 11.8% back then was a bit optimistic. Over the next week, a number of retail firms report and perhaps the tech-heavy 16%+ growth rate will come down a bit. We think earnings growth stays well into the teens. Regardless, the fourth quarter of 2024 is shaping up to be a strong quarter for earnings in the S&P 500. Nine of 11 sectors are currently ahead of their “pre-season” estimates. 

Last year’s tech darling, NVIDIA, is set to report on February 26. This week some of the notables include DuPont, Coca-Cola, CVS, Deere and Texas Pacific Land. Stocks are always looking forward and traders in particular want to know what’s next. At times, management’s description of their business conditions and their outlook can be more important than what their earnings report card says. We are in one of those times. To wit: The Magnificent 7 as a group have turned from massive tech-free cashflow generators to “industrial” capital expenditure machines. Look through the earnings releases for Meta, Microsoft and Alphabet. They are spending on infrastructure: data centers, power delivery and electricity production (buying nukes!). NVIDIA is churning out the chips for the data centers. Amazon is doing both: building data centers and sourcing its own chips. 

A number of management calls, notably Texas Instruments, have issued downbeat or lower sales guidance for the rest of the year. Tariff uncertainty, rising costs and foreign instability are some of the reasons cited. Regardless, analysts are starting to bring down full-year 2025 and first quarter 2025 estimates. We had long doubted the 15% full-year earnings growth touted by Wall Street. New estimates are riding down toward 10.8% to 11%. Depending how the economy fares mid- to late-year, we think 9% is reasonable. High single-digit growth is always welcome, especially if the business cycle is at a later stage than we think.  

Sideways

Most stocks have given up their “Trump Bump” rally of November–December. Typical of this time of year, most indices are moving back and forth in a narrow range. This sort of consolidation is normal, if a bit boring. Advance/decline lines, the percentage of stocks above their moving averages and volume, have all gone flat (on vacation?) the past couple of weeks. 

We would like to think markets are rebuilding energy for another advance. This may be, but the market and news noise want us to emotionally grab onto the threat of tariffs and D.C. drama uncertainty. Interest rates are also on pause. The Fed is not going to raise rates anytime soon; Chairman Powell and other Committee members have made that clear. Futures markets are pricing a move lower in September. At this point we think a strong jobs market and/or persistent inflation could force the Fed higher by then, not lower. Stay tuned! 

Adjusted reality

This time a year ago, the Bureau of Labor Statistics released their annual update to the nonfarm payroll data. They estimated that 2023’s March totals should be reduced by 818,000. A fair number of economists expressed doubt about the adjustments because they were much larger than normal. This year, the adjustment to the adjustment (really) is only a drop of 589,000. Less is better and while we raise eyebrows occasionally, we respect the fact that the bean counters at BLS have a tough job. 

The BLS gave us more signs that the economy is slogging along at a 2% to 2.5% real growth pace came last Friday. January job gains totaled a steady 143,000. The unemployment rate dropped to 4%, thanks to the addition of roughly two million persons to the labor force. The economy remains near full employment but not in danger of overheating. 

Trump Tariffs

Foremost on the minds of traders are the possible effects of tariffs. Last week’s drama was of a different kind. The Mexico and Canada tariffs were statecraft — using mercantilist policies of trade to achieve a political end. Ending illegal drugs and border crossings were the aims. The additional 10% tariffs on China were pointing more to the source of the drug components than an economic reason. 

On Monday the 10th, Trump stepped back into the economic arena with a new 25% tariff on all steel imports. He also increased his 2018 aluminum tariff from 10% to 25%. These will take effect on March 12. Our largest source of steel imports is Canada. Mexico also is on list. Both metals will raise prices for cars and machinery almost immediately. Ford’s CEO Jim Farley was out on tape stating that vehicle prices could increase by $3,000 and result in job losses. Twenty-seven percent of GM’s sales volume comes from vehicles produced in the two countries, according to RBC. We understand that both Canada and Mexico want to negotiate. 

Next up are reciprocal tariffs. These should be announced sometime this week. These tariffs will cover a wide range of products across many countries. Trump basically wants “equality” so if France tariffs our Mac and Cheese 10%, then we should raise our (almost zero) tariff on French cheese to 10%. Over the next year, the administration wants to raise $160 billion to offset tax cuts proposed in Congress.