VIDEO: 2025 is tracking better than our original expectations made in early Dec with 5 primary reasons driving this.
Please click below to view our Macro Minute (duration: 3:42).
The S&P 500 is up +3.7% so far in January with supportive recent declines in USD, US 10-yr yields and VIX (volatility). And 4Q24 earnings season is underway, which has been positive overall. So, stocks are going up for the “right” reasons:
- There was quite a bit of investor angst between early Dec (especially post-Dec FOMC) and mid-January, so the gains in equities have taken place almost entirely in the past week or so. Given we are 3 weeks into 2025, I thought it would be helpful to do a “sanity check” and compare how US equities are tracking versus our base case (2025 Outlook) from early December.
- In short, there are 5 reasons 2025 is tracking better than our “base case”:
– Barometer “first 5 days” positive = 82% win-ratio
– Sentiment capitulation on Dec to Jan chop = good
– Inflation tracking “softer” than consensus view
– Fears of “day 1 tariffs” overblown = USD weaker
– Cyclicals leading YTD = risk-on signal
– overall, 2025 tracking “above expectations” - January “first 5 days”: We spoke of the importance of this signal in many prior years. For whatever reason, equities reveal their hand early in the calendar year. A good year starts out strong — most cases:
– Jan 2025 “first 5 days”: +0.6%
– since 1950, 28 years >0 first 5 + >10% prior year
– FY median gain +13%, win-ratio 82%
– So this data points to higher conviction that 2025 will be a double-digit gain year - Sentiment capitulation: There was a meaningful reset in sentiment this year, best evidenced by the -15 point collapse in AAII % bulls less % bears. As we discussed last week, this was only seen at major lows like Nov 2023 and Oct 2022. So the grind from early Dec to mid-Jan caused a similar capitulation in sentiment.
- Inflation tracking softer: There were 2 data points supporting a softer inflation picture:
– first, Dec core CPI +0.24%, lowest reading since July 2024
– more importantly, shelter only grew +0.30% MoM
– this is +0.14% contribution to Core CPI, one of lowest readings since 2019
– second, BLS new tenant rent index published
– shows new year now down YoY, breaking trend
– this points to Fed potentially doing more than 2 cuts in 2025 = good - Tariff fears “overblown”: Many investors worried Trump would implement major tariffs day one. But in the 3 days since taking office, there has been little seen on tariffs on the executive orders. This is triggering a decline in USD (other currencies rallied) and also arguably leading to lower rates, as the risk of inflation pressures diminish. This is good for stocks.
- Cyclicals lead = risk-on signal: The best performing sectors YTD:
– Bitcoin +9% (vs S&P 500)
– Industrials +4%
– Energy +3%
– Materials +2%
– Technology +1%
– Healthcare +1%
– Financials +1%
– You get the picture. Besides Healthcare, this is a cyclical outperformance
– which is risk-on
Bottom line: 2025 tracking better than our “base case”
Bottom line, 2025 is tracking better than our base case. We remain constructive and now see 2025 as less turbulent than we expected. The top sector ideas remain:
- Bitcoin
- Small-caps
- Financials
- Industrials
- Technology
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Key incoming data January:
1/2 9:45 AM ET: Dec F S&P Global Manufacturing PMITame1/3 10:00 AM ET: Dec ISM Manufacturing PMITame1/6 9:45 AM ET: Dec F S&P Global Services PMITame1/6 10:00 AM ET: Nov F Durable Goods OrdersTame1/7 8:30 AM ET: Nov Trade BalanceTame1/7 10:00 AM ET: Dec ISM Services PMITame1/7 10:00 AM ET: Nov JOLTS Job OpeningsTame1/8 9:00 AM ET: Dec F Manheim Used vehicle indexTame1/8 2:00 PM ET: Dec FOMC Meeting MinutesTame1/10 8:30 AM ET: Dec Non-Farm PayrollsHot1/10 10:00 AM ET: Jan P U. Mich. Sentiment and Inflation ExpectationHot1/13 11:00 AM ET: Dec NY Fed 1yr Inf ExpTame1/14 6:00 AM ET: Dec Small Business Optimism SurveyTame1/14 8:30 AM ET: Dec PPITame1/15 8:30 AM ET: Dec CPITame1/15 8:30 AM ET: Jan Empire Manufacturing SurveyTame1/15 2:00 PM ET: Jan Fed Releases Beige BookTame1/16 8:30 AM ET: Dec Retail Sales DataTame1/16 8:30 AM ET: Jan Philly Fed Business OutlookMixed1/16 10:00 AM ET: Jan NAHB Housing Market IndexTame1/17 9:00 AM ET: Jan M Manheim Used vehicle indexTame1/17 4:00 PM ET: Nov Net TIC FlowsTame- 1/24 9:45 AM ET: Jan P S&P Global Manufacturing PMI
- 1/24 9:45 AM ET: Jan P S&P Global Services PMI
- 1/24 10:00 AM ET: Jan F U. Mich. Sentiment and Inflation Expectation
- 1/24 10:00 AM ET: Dec Existing Home Sales
- 1/27 8:30 AM ET: Dec Chicago Fed Nat Activity Index
- 1/27 10:00 AM ET: Dec New Home Sales
- 1/27 10:30 AM ET: Jan Dallas Fed Manuf. Activity Survey
- 1/28 9:00 AM ET: Nov S&P CoreLogic CS home price
- 1/28 10:00 AM ET: Jan Conference Board Consumer Confidence
- 1/28 10:00 AM ET: Dec P Durable Goods Orders
- 1/29 2:00 PM ET: Jan FOMC Decision
- 1/30 8:30 AM ET: 4Q A 2024 GDP
- 1/31 8:30 AM ET: Dec PCE Deflator
- 1/31 8:30 AM ET: 4Q Employment Cost Index
Economic Data Performance Tracker 2025:
Economic Data Performance Tracker 2024:
Economic Data Performance Tracker 2023:
