Help Wanted

Jan 13, 2025

By Jack Kraft, CFA, Vice President, Investment Strategist
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U.S. equities ended the week lower as strong economic data raised uncertainty about the Federal Reserve’s (Fed’s) rate cut trajectory. It seems the economy’s “Now Hiring” sign has investors second-guessing the market’s trajectory—good news for jobs is being read as bad news for stocks, at least in the short-term. On Friday, the S&P 500 and Nasdaq slipped 1.5% and 1.6%, respectively. Meanwhile, Treasury yields have spiked to their highest level since November 2023. On the week, the major averages were lower, with the Dow and S&P 500 both losing 1.9%, while the Nasdaq Composite shed 2.3%.

The sell-off this week was broad-based with technology and real estate losing more than 3.0%. Meanwhile, energy was this week’s “Employee of the Month,” gaining more than 1.0% as West Texas Intermediate crude oil has rallied over 6.0% year-to-date. The S&P 500 is now down roughly 4.5% from all-time highs. That drawdown is steeper if you look at the equal-weighted index, which is off nearly 8% from its highs marked in November. Markets are likely showing signs of volatility due to the “interview jitters” of uncertainty. The Fed has a less clear path to its neutral rate, valuations remain elevated and the new administration is set to take office in a few days, which will shift policy.

The labor market garnered attention Friday as the nonfarm payrolls report showed that 256,000 jobs were added in December, well above the consensus forecast of 155,000. The unemployment rate ticked down to 4.1%, while average hourly earnings rose 0.3%. Since August, the labor market has rebounded with three-month average payrolls growth showing a healthy 170,000. This stronger-than-expected data has pushed out investor expectations for rate cuts in 2025. According to the CME FedWatch Tool, traders are pricing in a 25% chance of a cut in March, down from more than 50% a month ago. This report likely buys the Fed more time to take a wait-and-see approach in easing monetary policy during 2025. Now expectations are for one 25-basis-point cut this year, compared to expectations for four cuts a few months ago.

Overall, the report should be viewed as bullish for long-term U.S. investors. Economic activity remains strong, and companies are eager to hire, which is a positive sign for profit growth. Investors will shift their focus from macroeconomic factors to company-specific details this week with the kickoff to fourth-quarter earnings season that is likely to offer a closer look at how individual firms are capitalizing on these favorable conditions.

The bar for earnings growth is set high, with analysts forecasting 8% year-over-year growth in the fourth quarter for the S&P 500. Furthermore, earnings growth is expected to accelerate in 2025 to more than 10%. Investors will be looking for evidence of this during earnings season, with future guidance playing a critical role. If companies can demonstrate that 2025 will be as strong as analysts are forecasting, the recent market pullback can be seen as a healthy reset as uncertainty clears up. Strong 2025 earnings growth would also reduce the risk of seeing a valuation crunch in 2025 and could serve as the catalyst needed for the market to reach new highs. Let’s dive into some investment themes that are helping drive some of the earnings growth being forecasted.

Looking back on 2024, the top investment themes that rewarded investors were artificial intelligence (AI) and GLP-1s. On the AI front, hyperscalers—mega-cap companies operating large-scale cloud computing infrastructure—spent an estimated $220 billion on AI chips and data centers in 2024. This trend is expected to accelerate in 2025, with Microsoft alone forecasting $80 billion in spending on AI-enabled data centers. Nvidia is a prime example of this growth, with stellar “performance reviews” from Wall Street analysts who are projecting its revenue to soar from approximately $60 billion in 2024 to nearly $130 billion in fiscal-year 2025. Nvidia appears to be defying the law of large numbers and is still gaining momentum, reinforcing the belief that artificial intelligence (AI) remains a compelling and investable theme heading into 2025.

As the AI revolution drives unprecedented investment in semiconductor chips and data centers, it’s important to consider the ripple effects on other critical sectors. One of the more compelling knock-on effects and another investable theme for 2025 is the surge in power demand required to sustain this massive infrastructure. New data centers need to be built, old data centers need to be upgraded, and they all require round-the-clock power. According to Goldman Sachs, U.S. power demand growth is expected to accelerate at a compounded growth rate of 2.7% for the next five years due to data center demand. To put this in perspective, power demand over the past 10 years has risen 0%, due to efficiency gains offsetting the increase in demand.

The theme of power growth in the United States is still in the early innings, as the demand for related infrastructure components will continue to accumulate throughout 2025. This will flow downstream to companies that provide services such as battery storage, generators, electrical components and cooling solutions—all essential for building new data centers and upgrading existing ones.

The next theme centers on the resilience of mega-cap stocks. The “Magnificent Seven” —NVDA, AMZN, GOOGL, META, MSFT, AAPL and TSLA— is expected to see strong earnings growth in 2025; although it will decelerate from 2024, the forecast remains nearly double that of the broader index. These companies (with the exception of TSLA due to its elevated valuation) continue to stand out as flights to safety during periods of market volatility, offering a strong foundation. They combine factors such as strong balance sheets and solid competitive advantages that make them well-positioned to navigate a challenging market environment.

Another theme worth mentioning is portfolio positioning for the new Trump administration. This looks to be a three-part narrative comprised of deregulation, lower corporate tax rates and a potential headwind from tariffs. Deregulation is likely to bolster the M&A market, creating opportunities for dealmaking across industries. Meanwhile, a reduced corporate tax rate—if passed—could boost earnings for companies generating the bulk of their revenue in the United States. However, the focus on tariffs may act as a near-term headwind, potentially driving a temporary uptick in inflation as companies reconfigure their supply chains.

The last investment theme to highlight is don’t discount value stocks in 2025. By nearly every valuation metric, the market is nearing peaks last seen in 2021 and 2022—right before value stocks outperformed growth. However, the key difference now is that the bull market remains in a late-cycle expansionary phase, with earnings growth expected to stay above average through 2025. In contrast, stocks entered an earnings recession in 2022 as the Fed tightened monetary policy. Despite elevated valuations overall, certain sectors like energy, health care and consumer staples still trade at reasonable levels for patient investors.

Economic Calendar Jan 13. – Jan. 17

Time (ET) Report Period Median Forecast Previous
MONDAY, JAN. 13
2:00 PM Monthly U.S. federal budget Dec. -$75B -$129B
TUESDAY, JAN. 14
6:00 AM NFIB optimism index Dec. 100 101.7
8:30 AM Producer price index Dec. 0.30% 0.40%
8:30 AM Core PPI Dec. 0.10%
8:30 AM PPI year over year 3.00%
8:30 AM Core PPI year over year 3.50%
2:00 PM Fed Beige Book
WEDNESDAY, JAN. 15
8:30 AM Consumer price index Dec. 0.30% 0.30%
8:30 AM CPI year over year 2.90% 2.70%
8:30 AM Core CPI Dec. 0.20% 0.30%
8:30 AM Empire State manufacturing survey Jan. -0.5 0.2
THURSDAY, JAN. 16
8:30 AM Initial jobless claims Jan. 11 210,000 201,000
8:30 AM U.S. retail sales Dec. 0.40% 0.70%
8:30 AM Retail sales minus autos Dec. 0.40% 0.20%
8:30 AM Import price index Dec. -0.30% 0.10%
8:30 AM Philadelphia Fed manufacturing survey Jan. -6 -16.4
10:00 AM Business inventories Nov. 0.10% 0.10%
10:00 AM Home builder confidence index Jan. 46 46
FRIDAY, JAN. 17
8:30 AM Housing starts Dec. 1.32 million 1.29 million
8:30 AM Building permits Dec. 1.46 million 1.51 million

 

Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market