Settling Into a New Administration
Despite an abbreviated trading week, markets look to close solidly higher. Corporate earnings were the focus this week, as over 30 companies in the S&P 500 reported. Several large U.S. banks kicked off fourth-quarter earnings season with results broadly positive. While the earnings season is only just starting, if trends continue, we should expect earnings to grow by roughly 11% in the fourth quarter. For the full year, it is now expected earnings will have grown 9% in 2024, which is a very good year indeed. Encouragingly, earnings momentum is expected to continue in 2025, with current estimates calling for 15% profit growth (which is admittedly optimistic). With continued growth, we expect a broadening of leadership in 2025.
One of the stories that moved markets this week was the introduction of a new AI initiative. I know you’re probably as tired of artificial intelligence as I am, but I’m sorry to say we’re going to continue hearing about it for the foreseeable future. On Tuesday, President Trump announced a joint venture between tech companies Oracle, ChatGPT, and Softbank, which pledged to invest up to $500 billion in AI infrastructure over the next four years. China, among other industrialized countries, has in recent years, shifted its economy from construction to scientific and technological endeavors. While the U.S. remains on the cutting edge, the rest of the world is quickly catching up. This AI strategy is important and will benefit not only our national interests but the companies that are well-suited to build out that security. It is those companies we aim to find.
Financial markets, and especially currencies, have been reacting to Trump headlines as the new administration starts to lay out its policies for the next four years. Despite threats of tariffs on Canada, Mexico, and China, equities have welcomed the fact that Trump has so far held off on imposing tariffs on trade partners in his first few days in office. No doubt, developments on trade will be a source of uncertainty in the months ahead. However, what is implemented may not be as onerous as feared, and regardless of which trade scenario plays out, the U.S. economic and earnings growth momentum remains strong.
Lastly, corporate earnings season is off to a solid start, as I alluded to above. With 16% of companies reporting fourth-quarter earnings, 76% have beaten analysts’ expectations, with an average upside surprise of 7.4%. You may be surprised to learn that over the past six months, the consumer discretionary, financial, and industrial sectors have outperformed the technology sector. This rotation is most noticeable as we rebalance portfolios, and instead of selling down overweight technology positions, as has been the case for over a year now, we instead find ourselves reducing position sizes in companies like JP Morgan, Citibank, or even AT&T. That’s not to say the Magnificent 7 stocks (Apple, Microsoft, Google, Amazon, Nvidia, Meta Platforms, and Tesla) are out of favor forevermore. Instead, it suggests the laggards are now being given a chance to catch up.
In closing, I came across an interesting article on working out. No, I didn’t suddenly join a gym or sign up for a Pilates class. Turns out the U.S. has done what it does best… turn fitness into an activity that requires money. It seems other countries bake fitness into their lifestyles more directly. For example, people in Finland choose to walk everywhere despite freezing temperatures and limited daylight. Their mentality is “no bad weather, only bad clothes.” In the Netherlands, transportation is all about the bicycle. Japan embraces short bursts of exercise in public locations such as parks, office buildings, and schoolyards. Groups of people join together throughout the day in a three-minute, 13-move calisthenic routine. In Brazil, fitness is more akin to a party than a workout. Beaches are routinely packed with people playing beach volleyball and soccer games on the sand. It seems Brazilians are more prone to do things together than by themselves. We here in the U.S. could stand to learn a thing or two from these different cultures. Perhaps instead of going to the gym, we could try walking a bit more, bicycling, or even trying light calisthenics, which don’t require an expensive membership. It seems to work for others around the world. Now you know.
Bruce J. Mason, MBA