Executive summary:
- Mixed start to earnings season
- Breadth improving with equal weight outperforming cap weighted index
- DeepSeek sends shockwaves through the AI trade
- Fed holds rates steady as expected – no cuts expected until June
- Developments out of Washington dominated headlines
Index performance for January:
U.S. equities ended higher in January after mostly declining last month. Breadth was positive, with the equal-weighted S&P outperforming the official index by over 70bps. Despite the equal weight outperformance, the S&P 500 reached new record highs during the month, closing just below those figures. Small-caps also improved, with the Russell 2000 recovering some of its 8% loss from December. Treasuries were firmer with some yield curve steepening, while Gold was up 7.1%, reaching new record highs, and Bitcoin futures were up 9.3%. WTI crude was up 1.1%, with concerns about supply disruptions from sanctions on Russian oil and possible 10% tariffs on Canadian oil.
While developments out of Washington dominated headlines this month, the market continued to benefit from animal spirits, deregulation dynamics, corporate buybacks, and some rate reprieve. Despite not being officially announced before month end, new tariffs have since been announced by the Trump administration on both Mexico and Canada (25%) and 10% against China. Additionally, President Trump noted tariffs on chips, steel, aluminum and copper in near future and mentioned he has not settled on a universal tariff rate. He did suggest though it will be “much bigger” than the initial 2.5% Treasury Secretary Bessent reportedly favored.
The AI-growth narrative faced a setback as China’s seemingly affordable DeepSeek AI model triggered a selloff in AI-related stocks. This led to increased scrutiny on the extent of U.S. tech spending on their models, pricing power, and broader questions about America’s leadership in the global AI race. Concerns about Big Tech emerged, adding to existing worries about stretched valuations. Additionally, the idea that AI applications could be implemented at a fraction of the expected costs raised questions about extensive capital expenditure plans. While the initial shock was jarring, it does appear as though the cost savings were overblown and the breakthroughs DeepSeek discovered are repeatable for other players which can still benefit from having a large compute advantage.
Moving to the Fed, the January FOMC meeting resulted expectedly in no changes to the benchmark rates which remained at 4.25-4.50%. It was mostly an uneventful meeting and press conference with market not expecting another rate cut until June. At the press conference, Chair Powell mentioned the Fed is in no hurry to make changes as recent inflation readings have been good and could get help from easing shelter inflation. Analysts generally see an extended hold from the Fed moving forward though some say in-line inflation readings possibly leading to cuts by midyear.
Turning to economic data, December core CPI came in slightly ahead of consensus, while headline was slightly below. Analysts believe core CPI inflation trend is still slowing toward the FOMC’s target, particularly after December PPI came in cooler than expected. It should be noted though December nonfarm payrolls were much hotter than expected printing growth of 256k jobs vs consensus estimates between 150k-160k, with the unemployment rate ticking down to 4.1%.
Sector performance total return for January:
Earnings commentary:
With 36% of S&P 500 companies reporting earnings for Q4’24, the results have been mixed. According to FactSet, of these companies, 77% have reported actual EPS above estimates, which is equal to the 5-year average of 77% but above the 10-year average of 75%. In aggregate, companies are reporting earnings that are 5.0% above estimates, which is below the 5-year average of 8.5% and below the 10-year average of 6.7%. Since December 31, positive EPS surprises reported by companies in the Financials and Communication sectors, partially offset by negative EPS surprises reported by companies in the Industrials sector, have been the largest contributors to the increase in the overall earnings growth rate for the index over this period.
While the percentage of S&P 500 companies reporting positive earnings surprises is above the 10-year average, the magnitude of earnings surprises is below the 10-year average. However, S&P500 companies are reporting higher earnings for the fourth quarter today relative to the end of last week and relative to the end of the quarter. In addition, the index is reporting its highest year-over-year earnings growth rate for Q4 2024 in three years. The blended (actual + estimates) earnings growth rate for the fourth quarter is currently 13.2% which would be the highest year over year growth rate since Q4’21. It would also mark the sixth consecutive quarter of YoY earnings growth for the index.
Seven out of the eleven sectors are showing year-over-year earnings growth for Q4, with five of these sectors experiencing double-digit growth: Financials, Communication Services, Information Technology, Consumer Discretionary, and Utilities. Alternatively, four sectors are seeing a year-over-year decline in earnings for the quarter, with Energy and Industrials reporting double-digit declines.
In terms of revenues, 63% of S&P 500 companies have reported actual revenues above estimates, which is below the 5-year average of 69% and the 10-year average of 64%. On average, companies are reporting revenues that are 0.9% above estimates, which is below the 5-year average of 2.1% and the 10-year average of 1.4%. Since December 31, positive revenue surprises from companies in the Financials, Consumer Discretionary, Health Care, and Energy sectors have significantly contributed to the overall revenue growth rate for the index during this period.
Eight sectors are reporting year-over-year revenue growth for Q4, led by the Information Technology sector. On the other hand, three sectors are reporting a year-over-year decline in revenue for Q4, led by the Industrials sector.
Sales and earnings results by S&P sector:
2-day price reaction following earnings releases:
Fed:
Yield Curve 1M Change:
Gold:
Bitcoin:
DXY:
Looking ahead:
February will bring the conclusion of Q424 earnings season, as well as further economic data including jobs, inflation and GDP. With the Fed currently in a holding pattern the focus should turn to the micro from broader macro, but any gyrations in the data could throw a wrench into things. The implementation of the newly announced tariffs on both Mexico and Canada will be a development to watch as investors assess retaliatory measures. The month is in the bottom third in terms of historical monthly returns over the last 10 years, with an average return of 0.15%, although in 2024 it was the second best performing month with a return of 5.17%, trailing only Novembers 5.73%.
Economic Calendar:
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