It is important to note that tariffs can also harm the economies on which they are imposed. If earnings trajectories were to change due to tariffs, we should anticipate corresponding shifts in prices. The current market situation is at a standstill as tariffs are generally viewed as detrimental to all economies involved, leading to potential decreases in earnings estimates. Many companies and analysts are holding off on making revisions until a more concrete decision is made. Despite this uncertainty, the stock market continues to trade near its peak, with investors and traders speculating that new tariffs may not materialize or may have minimal impact. Perhaps the market is justified in its optimism, and companies and analysts may not need to revise their earnings forecasts. It could be argued that policymakers aim to avoid destabilizing the stock market. Nevertheless, predicting the future of the stock market remains a challenge.
Macroeconomic Review
Since our last review, there have been significant developments in the labor market and macroeconomic indicators:
– The labor market continues to show growth, with U.S. employers adding 143,000 jobs in January, marking the 49th consecutive month of gains. Total payroll employment has reached a record high of 159.1 million jobs, an increase of 6.8 million from before the pandemic.
– The unemployment rate dropped to 4.0% in January, close to its lowest level in 50 years but slightly higher than in October 2021.
– Wage growth has accelerated, with average hourly earnings rising by 0.48% in January and 4.1% year-over-year.
– Job openings decreased to 7.6 million in December, indicating a slight decline in labor demand compared to the previous month.
– Layoffs have remained low, with employers laying off 1.77 million people in December, maintaining pre-pandemic levels.
– Hiring activity remains strong, with employers hiring 5.46 million people in December, although the hiring rate has been trending downwards.
– The quits rate, at 3.2 million workers in December, suggests that fewer people are leaving their jobs, possibly due to increased satisfaction, limited job opportunities, cooling wage growth, or improved productivity.
Overall, the labor market shows signs of resilience, but certain indicators suggest potential challenges ahead.
Labor productivity in the nonfarm business sector increased by 1.2% in the fourth quarter of 2024, with output rising by 2.3% and hours worked increasing by 1.0%. Compared to the same quarter a year ago, productivity grew by 1.6%, and the annual average productivity saw a 2.3% increase from 2023 to 2024. Unemployment claims rose slightly, with initial claims for benefits reaching 219,000 in the week ending February 1, up from 208,000 the previous week, though still indicative of economic growth.
Job switchers experienced higher pay growth, with a 6.8% increase in annual pay for those who changed jobs, compared to a 4.7% growth for those who remained in their current positions. Consumer sentiment declined for the second consecutive month, reaching its lowest level since July 2024, influenced by various factors including perceptions of tariff policies impacting buying conditions for durables.
Despite weakening consumer sentiment, card spending data remains strong, as reflected in the increase in Chase Consumer Card spending compared to the previous year. Gas prices rose by two cents to $3.13 per gallon, driven by increased demand and fluctuations in gasoline production. Supply chain pressures have eased, as indicated by the New York Fed’s Global Supply Chain Pressure Index, which remains close to historical norms.
Business investment activity is at record levels, with core capital goods orders increasing by 0.4% to $74.7 billion in December. These orders serve as a leading indicator for future economic activity, highlighting positive trends in business investments.
While the growth rate has stabilized somewhat, it continues to indicate economic strength in the upcoming months. Service surveys also point towards growth. For instance, S&P Global’s January U.S. Service PMI noted a slowdown in service sector activities at the beginning of 2025, albeit at a reduced pace compared to the robust gains seen towards the end of the previous year. This slowdown may be attributed partly to disruptions caused by adverse weather, suggesting that growth in the service sector might pick up in February. Increased hiring further supports the expectation of a return to robust growth.
Similarly, the ISM’s January Services PMI reflected a similar trend, while manufacturing surveys showed improvement. S&P Global’s January U.S. Manufacturing PMI highlighted renewed optimism in the sector, with businesses expressing confidence in future prospects, marking one of the highest levels recorded in nearly three years. This positive sentiment was also reflected in the ISM Manufacturing PMI, which indicated growth in January for the first time since 2022.
Construction spending saw a slight increase, while mortgage rates dipped slightly. Freddie Mac reported a decrease in the average 30-year fixed-rate mortgage, attributing the stability in rates to a firm economic outlook. Despite the increase compared to the previous year, purchase applications remained above last year’s levels, indicating ongoing demand in the housing market.
The office occupancy rates varied across different regions, with some experiencing significant increases as workers began to return to the office. Near-term GDP growth estimates remained positive, with the Atlanta Fed’s GDPNow model projecting real GDP growth at a 2.9% rate in Q1.
In summary, the long-term outlook for the stock market remains favorable, supported by expectations of sustained earnings growth. While demand for goods and services remains positive, overall economic growth has moderated from previous levels. The economy appears to be less volatile currently, with major tailwinds such as job openings beginning to normalize.
The vibrancy of the economy has not waned. Consumer and business balance sheets are robust, contributing to a healthy economic landscape. Job creation is on a positive trajectory, and the Federal Reserve, after successfully managing the inflation crisis, is now focusing on bolstering the labor market.
Currently, we find ourselves in a peculiar phase where concrete economic data diverges from sentiment-driven indicators. Despite lackluster consumer and business sentiment, real economic activity continues to expand and achieve unprecedented levels. From an investor’s standpoint, what holds significance is the resilience of the tangible economic data.
Analysts foresee the U.S. stock market potentially surpassing the U.S. economy, primarily due to the positive operating leverage at play. Post-pandemic, companies have made aggressive cost adjustments, incorporating strategic layoffs and investing in cutting-edge equipment, particularly AI-powered technology. These strategic maneuvers are yielding positive operating leverage, enabling modest sales growth in a cooling economy to translate into robust earnings expansion.
Nonetheless, vigilance is key. Various risks loom, including U.S. political instability, global conflicts, energy price fluctuations, cyber threats, and other unforeseen circumstances. Any of these risks can trigger short-term market volatility.
It’s crucial to acknowledge that economic downturns and bear markets are inevitable in the market journey of long-term investors. Remain prepared for these eventualities and ensure your metaphorical stock market seat belts are securely fastened.
Nevertheless, there’s no indication that the economy and markets won’t navigate and overcome challenges in due course. The long-term perspective remains resilient, with a streak of success that enduring investors can rely on.
