03/03/2025 Market Strategy
Riders on the Storm
Multiple, Simultaneous Policy Transitions Have Raised Volatility
Key Takeaways
- With 97% of the firms in the S&P 500 index having reported, results exceeded expectations for the Q4 season with earnings rising 13.4% from a year earlier on 5.4% revenue growth. Before the season began, Bloomberg put analysts’ expected earnings growth at 7.3%.
- Among the sectors, nine are seeing earnings growth, with seven at double-digit rates. Two sectors are seeing earnings declines, with one (energy) at double-digit rates.
- This week, just ten firms are due to report as the season winds up. About 74% of firms that have reported have beaten analyst estimates.
- This week also brings the first indications of US economic performance in February with the ISM surveys of business conditions due on Monday and Wednesday and the nonfarm payroll report scheduled for release on Friday
With Q4 earnings season winding down, traders and investors will likely concentrate this week on a hefty brace of economic data and any news of developments on trade policy from Washington.
Two thirds of the way through the first quarter of the year, US equity markets and fixed income markets have experienced a pick-up in volatility as market participants and observers have parsed economic data, earnings trends, and consideration of the potential risks to economic growth and monetary policy from political transitioning and potential trade tariffs stateside and around the world.
Foreign equity markets have outperformed the US markets in 2025 through the end of February as stateside stocks have seen the performance leadership and trajectory of the technology sector come into question as other sectors gain the attention of investors and traders in a broadening of the stock market rally that began in the fourth quarter of 2022.
In our view, the broadening rally across sectors, market capitalizations, and style experienced so far should come as no surprise but rather something to be expected as investors seek diversification and anticipate the next leg of what is widely recognized as a bull market.
In the near term, concerns that come naturally with uncertainties of outcome are part and parcel in our view of any transitioning and are likely to persist for some time. The jostling of consumer emotions and subsequently challenges to bullish investor conviction from time to time should come as no surprise. Historically in the marketplace and in life experience suggests that change is never easy to digest even when a change is desired or needed.
Concerns about monetary policy as well as worries about many elected politicians’ proclivity for “kicking the can down the road” when it comes to addressing the need for and then finding a solution to the US national debt have been frequently shared with us by private and institutional investors over the years in many meetings and increasingly so after fiscal policy overstimulated the economy and fueled inflation in 2022 to levels unseen stateside in 40 some years and with the national debt reaching a level exceeding $36 trillion.
Once the Fed began addressing the rate of inflation it was not surprising to hear protests as higher interest rates pushed up borrowing costs tied to mortgages and the margin rates of leveraged market players and many others.
In fact the end of free money was a good thing as bond issuers once again paid for the privilege of borrowing money and bond buyers once again got something in return in the form of a meaningful coupon. This seemed to be missed by many who had benefitted from the ultra-low interest rates of the Great Financial Crisis and as a result of the Covid-19 pandemic.
You Can’t Have Your Cake and Eat it Too
The problem of dealing with what was “the end of free money” as the Federal Reserve raised rates eleven times and then held them at the highest levels for an additional nine FOMC meetings before beginning to cut the benchmark rates was tough to digest---even as the Fed successfully managed to bring inflation down from 9.7% in 2022 to somewhere between 3.4% to as low as around 2.8% recently and achieving that without pushing the US economy into a recession (at least so far).
Now as concerns about the National Debt (a bipartisan issue) come under day to day scrutiny and addressing the cost of government becomes the latest hot button issue to be addressed by the government and digested by the public and the markets they are invested in (via institutional representation or direct ownership of securities) a new narrative of angst and concern comes to the fore.
We have found personally that losing unneeded weight is generally never fun or easy. It requires discipline, patience, and a healthy approach. It is likely similar but a lot worse for our elected officials in dealing with bloated budgets and working to generate new efficiencies in the bureaucracies that manage the day to day operations of our government.
In our view, history points to dealing with the US debt problem now as better than kicking the can even further down the road as in the past. The outcome of addressing a central issue of this magnitude now rather than later will likely be better for the country and the markets than the crisis it could develop if left unchallenged.
So far the markets have found their way to climb the proverbial wall of worry through and beyond the Great Financial Crisis and the Covid-19 pandemic. Much experience has been gained as a result which will likely contribute to dealing effectively with the current sets of challenges to be addressed.
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