“All war is a symptom of man's failure as a thinking animal.” ― John Steinbeck

Good evening, 

Softer-than-expected economic data and strong bank earnings drove the stock market this week to reverse all of its early 2025 losses.  The S&P 500 is up about 2% this year.

Fundstrat Head of Research Tom Lee believes that there are “signs of market capitulation.”

The best news this week came on Wednesday from the December consumer-price index report, which showed prices rose 2.9% from a year ago and 0.4% from a month ago. The core CPI, which excludes the volatile food and energy components, notched its smallest gain since July and reversed three months of rising readings. 

Lee said there’s at least two reasons to believe why the trend of lower core CPI readings could continue. First, comparisons from last year would be arguably easier to beat. Second, it is because one of the big components—shelter—is “cooling sharply” and has been since early 2024. Our Chart of the Week shows more details:

On Wednesday, the benchmark 10-year Treasury yield fell to 4.653%. 

In response, the S&P 500 logged its best day since Nov. 6. Stocks held onto those gains to finish the week higher. The S&P 500 added 1%, while the Nasdaq Composite rallied 1.5%. Both notched their best week since the presidential election.

“This was a positive week with a positive development from the extinguishing of inflation hysteria,” Lee said. 

The earnings season, meanwhile, is off to a great start, with profits surging at banks from JPMorgan Chase to Goldman Sachs to Bank of America and even more consumer-focused ones like Wells Fargo.

To understand where market sentiment is, Lee pointed to the percentage of net bulls falling down 15% during the week ending Jan. 15, according to a survey by the American Association of Individual Investors. Lee considers that to be a “sign of bottom,” as the last time that happened was Nov. 2, 2023. The following year markets staged an impressive rally, as shown in the chart below.

Another contrarian indicator he flagged is the percentage of stocks in the S&P 500 trading above their 50-day moving average. This widely followed technical indicator fell to 16% earlier this week, the lowest it's been since November 2023. Head of Technical Strategy Mark Newton agrees that breadth could have bottomed. 

While it may look like the market’s new year doldrums are over, Lee added that a “full capitulation is arguably not here.”

Lee said that’s because the put/call ratio hasn’t surged above 1 for a sustained period, which would reflect that bearish sentiment is brewing. Nor did the short-term trading index move above 2.0. Typically, that would signal oversold conditions in the market.

Newton believes the same. “It’s not wrong to continue to refer to this short-term price action as being part of a bearish short-term consolidation, which began in early December,” he said. “This, in turn, is part of a larger bullish uptrend.”

The velocity of change in yields is also something he says is important to watch for all risk assets. “We need to see evidence of that happening before you can really have conviction that the equity market is going to have a sustained gain,” Newton said. 

The past month’s jittery movements in the market goes to show how investors are on edge and looking at each and every single economic report with a keen eye to determine the fate of the economy. 

Lee is watching whether stocks end January higher, as that could bode well for the rest of the year. Historical data shows that when stocks gain in January, full-year returns tend to be positive. 

He expects investors to be “dipping toes” into equities and add risk. 

[Editor's Note: Fundstrat offices and U.S. markets will be closed on Monday, Jan. 19, 2025, in observance of Martin Luther King Jr. Day. There will be no publications on that day.]

Elsewhere

Israel and Hamas agreed to a cease-fire agreement this week, ending a 15-month war. The Israeli cabinet approved the deal Friday after two days of debate, highlighting the fragility of peace-making efforts. Negotiators had reached an agreement earlier in the week, but then Israeli Prime Minister Benjamin Netanyahu accused Hamas of reneging on parts of the agreement. The final deal eventually passed with nothing of substance changed. It is scheduled to be implemented in phases, starting with freeing Israeli soldiers held in Gaza. 

Confirmation hearings this week for Donald Trump’s cabinet picks progressed. Pete Hegseth, nominated for the U.S. secretary of defense, battled against allegations of sexual assault, excessive alcohol use and financial mismanagement. Attorney General nominee Pam Bondi looked to reassure senators that her Justice Department would not weaponize against those targeting Trump. Meanwhile, Treasury secretary nominee Scott Bessent defended tariffs and argued for the tax-cut extensions during his confirmation hearing. 

Led by a surge in dealmaking and Main Street growing optimistic about their finances, big banks reported blockbuster earnings this week. JPMorgan Chase reported record quarterly and annual earnings and revenue. At Goldman Sachs, profit more than doubled. Citigroup and Wells Fargo also reported profit that came in higher than expected. The gains look better than they are because a year ago the banks collectively took billions of dollars in charges for a special assessment from the Federal Deposit Insurance Corp.

The Food and Drug Administration said Wednesday it is banning the use of Red No. 3, a synthetic dye ubiquitous in everything from Brach’s candy corn to Nesquik strawberry-flavored low-fat milk. The regulator cited the dye's decadeslong link to cancer in animals in explaining its decision. Food manufacturers will have until Jan. 15, 2027, to reformulate their products, while drug companies will get an additional year. 

The fires in Los Angeles are still raging. At least 27 people have died in the fires, according to the Los Angeles County Medical Examiner. The latest damages and economic losses are estimated to be at more than $250 billion, AccuWeather data show. Slower winds and cooler temperatures toward the end of the week helped firefighters make better progress in battling the fire. 

Weight-loss drugs are set to become even more mainstream. On Friday, the Biden administration announced the next 15 prescription drugs that will be subject to price negotiations between manufacturers and Medicare, and Ozempic and Wegovy made the list. (Notably, Eli Lilly's competitor treatments, Mounjaro and Zepbound, did not.) The agreed-upon prices for the second wave of drugs are scheduled to go into effect in 2027. Though it’s important to note that Trump may try to change or scale these provisions back. 

The Federal Trade Commission said this week it finalized an order to fine H&R Block with $7 million, alleging deceptive advertising. The tax-preparation company marketed its services as free in ads and online promotions even when many consumers weren’t eligible for it. The fine will be used to compensate consumers harmed by the company’s unlawful practices, according to the agency.

The Supreme Court came down hard on TikTok, unanimously upholding a federal law requiring the social-media platform’s Chinese owners to divest or shut down the social-media app by Jan. 19. Trump has signaled intent to rescue the beleaguered app, but for now, the app would be unavailable, at least for now, starting on Sunday.