- Nasdaq leads stocks higher, shaking off inflation concerns – Equity markets rose on Thursday, despite the producer price index (PPI) showing higher-than-expected wholesale inflation in January. Sector performance was broad, as materials and consumer discretionary stocks led to the upside. Bond yields dropped, with the 10-year Treasury yield at 4.53%. In global markets, Europe benchmark index STOXX Europe 600 reached a new all-time high on the potential for Ukraine peace talks*. The U.S. dollar declined versus major currencies. In the commodity space, gold traded higher, while WTI oil was little changed*.
- Producer price inflation higher than expected – Producer price index (PPI) inflation held steady at 3.5% annualized in January, above estimates calling for a decline to 3.2%*. Energy prices were a key contributor to wholesale inflation remaining elevated, rising 1.7% month-over-month**. Core PPI inflation, which excludes more-volatile food and energy prices, ticked down to 3.6% on a year-over-year basis, compared with forecasts of a larger drop to 3.3%*. We believe these readings, combined with yesterday's CPI report showing elevated inflation, will likely keep the Fed on hold for the time being. However, we expect inflation to continue to moderate, though the path will likely be bumpy and at times slower than expected. Shelter inflation should help in this effort, as it likely continues closing the gap with other measures of home prices and rent that show slower gains.
- Jobless claims edge lower: Initial jobless claims dropped to 213,000 this past week, slightly below estimates calling for 215,000 and the weekly average for this year of 214,000*. Continuing jobless claims, which reflect the number of people currently receiving unemployment benefits, declined to 1.85 million, also below forecasts for 1.88 million. These readings, combined with other recent data, indicate that the labor market remains healthy, in our view. With the unemployment rate at 4.0% and job openings exceeding unemployment, wage gains should remain above inflation. Positive real wage hikes should support consumer spending, which is favorable for the economy to continue its momentum.
Brian Therien, CFA
Investment Strategy
Source: *FactSet **U.S. Bureau of Labor Services
- Stocks decline on inflation concerns – Equity markets closed lower on Wednesday, as the consumer price index (CPI) showed higher-than-expected inflation. Sector performance was broadly lower, with energy and real estate stocks leading to the downside. Small- and mid-cap stocks, which tend to be more sensitive to interest rates, trailed large-cap stocks as bond yields ticked higher. In global markets, Asia was mixed, while Europe was mostly higher, as investors assessed the potential impact of higher U.S. tariffs. The U.S. dollar was little changed versus major currencies. In the commodity space, WTI oil traded lower on a rise in U.S. crude supply*.
- Key inflation measures edge higher - The consumer price index (CPI) ticked up to 3.0% annualized in January, above expectations to hold steady at 2.9%. Energy prices were a key contributor to the increase, rising 1.1% month-over-month. Core CPI, which excludes more-volatile food and energy prices, edged higher 3.3% on a year-over-year basis, above estimates calling for 3.2%*. Shelter inflation declined but remained elevated at 4.4% annualized, accounting for the majority of core inflation. We believe these readings argue that there is less urgency for the Fed to cut interest rates. However, we expect inflation to continue to moderate, though the path will likely be bumpy and at times slower than expected. Shelter inflation should help in this effort, as it likely continues closing the gap with other measures of housing prices that show slower gains. For example, the S&P Core Logic Case-Shiller Home Price index was up 3.8% through November over the year-earlier period**, while the Zillow Observed Rent Index rose 3.4% in 2024***. Average hourly earnings were up 4.1% annualized, outpacing inflation, which should be supportive of consumer spending and the economy.
- Bond yields rise on expectations for slower Fed rate cuts – The benchmark 10-year Treasury yield is up to 4.64%, as the CPI report prompted bond markets to push back expectations for Fed interest-rate cuts. Markets are now pricing one Fed rate cut this year, potentially in October or December. Fed Chair Jerome Powell delivered his semiannual testimony to the U.S. Senate Committee on Banking, Housing, and Urban Affairs on Tuesday, reiterating that the Fed can be patient in cutting interest rates and remains committed to bringing inflation down. The Fed's preferred inflation measure – core personal consumption expenditure (PCE) – is modestly lower than CPI at about 2.8% but remains above the 2% target. With the fed funds rate near 4.35%, monetary policy is restrictive, which should help to moderate inflation. The Fed should be able to ease toward a more neutral stance as inflation gradually cools, though the pace is likely to be slow.
Brian Therien, CFA
Investment Strategy
Source: *FactSet **S&P ***Zillow
- Stocks finish mixed ahead of key inflation data: Stocks were mixed on Tuesday, with the S&P 500 closing near the flatline, while the Nasdaq finished slightly lower.* From a leadership standpoint, consumer staples and energy were among the top-performing sectors of the S&P 500, with energy receiving a boost from higher oil prices.* Bond yields finished higher, with the 10-year Treasury yield rising to 4.54% and the 2-year Treasury yield climbing to 4.29%.* On the corporate front, shares of Coca-Cola were higher by roughly 4% after the company reported better-than-expected earnings and revenue for the fourth quarter.* Trade uncertainty remained a common theme, with President Donald Trump signing a 25% tariff on all steel and aluminum imports into the U.S. on Monday. The tariffs are expected to take effect on March 4. President Trump has also stated he will impose reciprocal tariffs this week on trading partners who currently tariff U.S. imports. Additionally, Fed Chair Jerome Powell testified before the Senate Banking Committee, reiterating his previous comments that the Fed can take a gradual approach to further easing of monetary policy given that inflation remains above the Fed's 2% target and the economy remains on strong footing. Inflation will be in focus tomorrow with the release of consumer price index (CPI) inflation for January.
- Corporate earnings have exceeded expectations for the fourth quarter: With roughly 65% of the companies in the S&P 500 having announced fourth-quarter results, earnings are on pace to grow by roughly 16% year-over-year.* If the current growth rate holds, it would be the strongest rate since 2021.* Of the companies that have reported, roughly 77% have exceeded analyst expectations for earnings by an average margin of 7.5%.* Looking into the drivers, the financials sector has seen the strongest growth, with earnings per share on pace to grow by more than 50%.* Additionally, growth sectors, such as technology, consumer discretionary and communication services, are on pace to see strong fourth-quarter earnings growth.* Healthy earnings growth is expected to carry over into 2025, with analysts expecting S&P 500 earnings growth of roughly 13%.* Additionally, all 11 sectors of the S&P 500 are expected to see positive profit growth this year, which, in our view, should support balanced performance between growth- and value-style stocks.*
- Small business optimism declined in January but remains above the 30-year average: The NFIB small business index declined modestly from 105.1 in December to 102.8 in January but remained above the 30-year average of roughly 98 for the third consecutive month. The NFIB small business index is calculated from a survey of U.S. small businesses and can provide a gauge into the health of small businesses and the broader economy. Encouragingly, 18% of businesses reported in January that inflation was their single biggest problem, which was the lowest reading since 2021. Additionally, the percent of firms planning to increase prices over the next three months fell from 28% in December to 26% last month, which could point to lower inflation in the months ahead. In our view, the economic environment should remain supportive for small businesses throughout 2025 despite the uncertain policy backdrop. We believe that borrowing costs have likely peaked and that inflation should continue to trend lower over the months ahead, providing support to profit margins. As part of our opportunistic portfolio guidance, we recommend an overweight allocation to U.S. mid-cap stocks and a neutral allocation to U.S. small-cap stocks. To view our full suite of portfolio guidance, check out our Monthly Portfolio Brief.
Brock Weimer, CFA
Investment Strategy
Source: *FactSet
- Stocks finish higher: Stocks rose to start the week, with the S&P 500 gaining 0.7% and the Nasdaq Composite gaining 1%.* Leadership was broad, with most sectors of the S&P 500 finishing higher, led by the information technology and energy sectors.* Markets took the latest tariff news in stride, as President Donald Trump announced over the weekend that the U.S. will impose tariffs of 25% on steel and aluminum imports. He also stated that the U.S. would announce reciprocal tariffs on countries that currently tariff U.S. imports. This would represent a more targeted approach to tariffs as opposed to universal tariffs which were previously discussed, which is likely why markets responded positively. However, it remains uncertain what measures will ultimately be implemented. Overseas, Asian markets finished higher overnight, while markets in Europe traded higher as well following an improvement in the Eurozone Sentix Investor Confidence Survey. Bond yields were little changed on the day, with the 10-year Treasury yield closing around 4.5%.*
- Key inflation data on the horizon: Inflation and its impact on monetary policy will be in focus this week with the release on Wednesday of consumer price index (CPI) inflation for January. Expectations are for headline CPI to rise by 0.3% for the month and 2.9% on an annual basis, while core CPI (which excludes food and energy) is expected to post a 0.3% monthly gain and rise by 3.1% annually.* A normalizing but still healthy labor market and strong productivity gains should allow inflation to trend lower while economic growth remains healthy. Given the U.S. economy remains on strong footing, and inflation is above the Fed's 2% target, the Fed can take a gradual approach to easing monetary policy. Futures markets are currently pricing in just one quarter-point interest rate cut from the Fed in 2025.**
- Broadening leadership showcases the importance of diversification: Despite a volatile start to 2025, stock markets are well into positive territory year-to-date, with the S&P 500 higher by roughly 3.1% through today's close.* Looking into the drivers of performance this year, we've seen a broadening of leadership, with areas outside of mega-cap technology stocks leading markets higher. Value stocks have risen by 4.5% year-to-date while growth stocks have posted a 2.7% gain.* While we're still in the early innings of 2025, we believe broadening leadership is a theme that will continue to play out in 2025. Earnings for value stocks contracted by 4% in 2023 and were roughly flat in 2024, while profits in growth stocks posted double-digit earnings growth in both years, fueled by profit growth in mega-cap technology companies, which comprise a large portion of the growth index.* Estimates for 2025 are calling for double-digit earnings growth in both growth- and value-style stocks, which in our view should pave the way for balanced performance between growth and value in the months ahead. As part of our opportunistic portfolio guidance, we recommend investors maintain neutral exposure between growth- and value-style stocks. To view our full suite of portfolio guidance, check out our Monthly Portfolio Brief.
Brock Weimer, CFA
Investment Strategy
Source: *FactSet **CME FedWatch Tool
Value stocks represented by the Russell 1000 Value Index.
Growth stocks represented by the Russell 1000 Growth Index.
- Stocks drop on inflation concerns – Equity markets closed lower on Friday, as inflation concerns impacted consumer sentiment. Despite today's decline, the S&P is positive for the year, up about 2.5%*. Bond yields ticked up as markets dialed back expectations for Fed interest-rate cuts, with the 10-year U.S. Treasury yield at 4.49%*. The U.S. dollar advanced versus major currencies. In the commodity space, WTI oil traded higher, as the U.S. imposed new sanctions on Iran's crude exports*.
- Job growth slows in January; prior months revised significantly higher – Total nonfarm payrolls grew by 143,000 in January, missing estimates for 170,000*. Figures for November and December were revised higher by 100,000. In total, job growth pushed the unemployment rate down to 4.0%. Hourly earnings were up 4.1% annualized, above forecasts calling for a 3.8% rise*. The upshot is that the labor market remains healthy, providing wage gains on average that are comfortably above inflation. Positive real wages should support consumer spending, which is favorable for the economy to continue its momentum. While strong wage gains are partially offset by productivity growth, they could lead to inflationary pressure, potentially pushing back Fed interest-rate cuts.
- Consumer sentiment weakens, driven by inflation concerns – The University of Michigan consumer sentiment index fell for the second consecutive month to 67.8, below expectations of 72.0 and the lowest reading in six months. Sentiment was impacted by near-term inflation expectations that rose sharply to 4.3%, from 3.3% the prior month*. Long-term consumer inflation expectations also edged higher to 3.3%, up from 3.2%. Inflation concerns are likely driven by tariff uncertainty. While tariffs could drive import prices higher, it's unclear when or if they could be implemented more broadly and for how long. Announced tariffs on Mexico and Canada were subsequently suspended, pending further negotiations. The 10% tariff hike on Chinese imports is in effect, though the response from China has been limited. In our view, the impact on overall inflation could be muted, as imports represent about 14% of the U.S. economy. In addition, foreign currencies could depreciate relative to the U.S. dollar, especially if central banks in those countries continue cutting interest rates. This could lower import prices in U.S. dollars, potentially partially offsetting tariffs. However, a meaningful escalation in trade tensions could spur some inflationary pressure and slower growth.
Brian Therien, CFA
Investment Strategy
Source: *FactSet