Weekly market wrap

Published February 14, 2025
 Two people looking at paperwork and iPad

Market Crosscurrents: Headlines vs. What's Unfolding

Key Takeaways: 

  • January's CPI came in hotter than expected, driven by broad increases, some of which may not be repeated next month. Core inflation has been stuck around 3.3% for the past eight months and could stay rangebound this year. However, we do not see a return to the above-4% inflation experienced in the post-pandemic period.
  • With price pressures persistent and the labor market solid, the Fed is in no rush to cut rates. We still believe that the bank's next move will be a cut, but the timing is likely pushed back to the second half of the year.
  • A leadership rotation is underway, challenging tech's dominant position. Earnings growth for the S&P 493 (S&P 500 minus the Magnificent 7) is accelerating after a two-year lull.
  • Counter to headlines amid trade uncertainty, European equity markets are outperforming so far in 2025. We recommend investors use pullbacks to add to cyclical, value-style, and international investments if they are underrepresented in portfolios. We would also view any rise in the 10-year Treasury yield above 4.5% as an opportunity to extend duration of portfolios and lock in attractive yields

We’re two months into the year, and markets are navigating conflicting forces, where headlines, sentiment, and what's unfolding often diverge. Inflation has come a long way since its post-pandemic surge but remains stubborn, keeping the Fed in a delicate balancing act as tariff risks loom. Meanwhile, corporations are posting strong earnings despite global uncertainty, and European markets - frequently overlooked - are quietly gaining strength.

The common thread amid policy shifts and uncertainties is solid fundamentals, which continue to provide a strong foundation for market resilience. We offer our perspective on the key crosscurrents shaping the investment landscape and highlight how market trends in some cases run counter to headlines.

Inflation

  • Headlines: Prices climb in January, threatening the return of high inflation
    • The January consumer price index (CPI) came in hotter than expected, rising 0.5% from the prior month and 3% from a year ago, the strongest annual change since June. Both food and energy were meaningful contributors, with food prices rising at the fastest monthly pace in two years, as egg prices jumped 15% due to avian flu1.
    • But the acceleration in prices was not limited to these items. Core inflation, which excludes food and energy, ticked higher to 3.3% from 3.2%, driven by an increase in prices for both goods and services. Some of the usual suspects included used vehicle prices (+2.2% from the prior month), car insurance (+2%), lodging (+1.4%) and airfare (+1.2%). This upside surprise comes on the heels of a jump in consumer inflation expectations to its highest since November 2023, as recorded by the University of Michigan survey1. And that's before any broad tariffs are implemented, which may have an impact on goods inflation, depending on how trade policy plays out.
       
  • What's Unfolding: Inflation progress is stalling out instead of reversing in a major way. However, consumers feel the strain of the cumulative price increases.
    • The uptick in inflation should not be dismissed, but one month's data does not make a trend. The boost in energy prices probably won't be repeated in February, as oil prices have averaged $72 so far this month after a brief spike to $80 in January1. Disruption in the food supply chain is possibly another "one-off" increase. And like last year, the price increases that many companies implement in January may not have been adequately captured by the seasonal factors.
    • Nonetheless, core inflation has been stuck around 3.3% for the past eight months, certainly higher than the Fed would like it to be. Offering a glimmer of hope is that rent inflation rose modestly last month. And several of the components of the producer price index that feed into the Fed’s preferred inflation (the personal consumption expenditures price index, which will be released on February 28) improved1.
    • We do not expect a major second wave of inflation this year, but price increases could stay rangebound above the Fed's target. Importantly, we do not see a return to the above-4% inflation figures that we experienced in the post-pandemic period.
    • However, consumers pay as much or more attention to the price tags rather than the rate of change. To this end, prices are about 13% higher compared with where they would have been had inflation grown at a 2% rate since 20211. This dynamic explains the difference between what consumers hear in the headlines vs. how they feel about inflation. The slowdown in January retail sales possibly reflects some consumer fatigue in addition to other factors, like the snowstorms and California wildfires, that may have been at play.
 The graph shows that on one hand inflation which represents the rate of price increases has made a lot of progress, but on the other hand the cumulative effect has led to the high prices that consumers are noticing.
Source: Bloomberg, Edward Jones.

Fed

  • Headlines: Fed is in no rush to cut rates, and hikes may be back in the conversation
    • At his semiannual testimony to the U.S. Senate, Committee Chair Powell reiterated that the Fed can be patient in cutting interest rates and that there is more work to do on inflation. That point became even more relevant after the disappointing CPI, which likely closed the door on a March rate cut. Bond-market pricing suggests that the next rate cut is now expected in October, with a small chance that the Fed might resume rate hikes in 20261.
       
  • What's Unfolding: Fed is comfortable keeping policy unchanged, but rate hikes are unlikely
    • While expressing no urgency to cut rates, Powell reiterated the Fed's view that policy is currently restrictive. To us, this implies that even if inflation proves persistent, policymakers can stay on pause for a prolonged time to get the desired inflation outcome rather than having to hike rates again.
    • Trade uncertainty is a known unknown, and tariffs may have a short-term impact, but the Fed may not view any one-time step-up in prices as an ongoing source of inflation. Last week President Trump introduced a plan for reciprocal tariffs that will be released on April 1. That would apply to nations that have a higher average tariff rate than the U.S., which would raise its own tariff to match them to equalize barriers to trade. It remains to be seen what will actually go into effect, but the time until it is implemented leaves a window for negotiations. One thing that seems certain is that news on trade will stay front and center this year, which is why it is important for investors not to overact to each single headline. For more of our views on tariffs, please see our report "Unpacking the potential impact of tariffs."
       

Stock-market leadership

  • Headlines: Magnificent 7 stocks had their worst earnings season since 2022
    • The Magnificent 7 group of companies (Apple, Microsoft, Amazon, Alphabet, Meta, NVIDIA, and Tesla) that comprise about a third of the S&P 500 weight has lost some of its luster so far this year. Even though the group has contributed more than half of the S&P 500 gain in the past two years, performance is lagging in 2025, while sales growth in the fourth quarter of 2024 was at its slowest since 20222. Increasing competition in the artificial intelligence (AI) arena and rising spending are raising concerns about valuations, which carry a 35% premium to the broader index2.
       
  • What's Unfolding: A leadership rotation is underway, as growth improves for the rest of the market
    • Profits for the Magnificent 7 are indeed slowing after two years of explosive growth. Yet, results remain strong. Earnings for the group rose 25% in the fourth quarter, still outpacing the S&P 500, but to a lesser extent than in the recent past2. Up until last week, tech was the only sector down for the year, a stark difference to its dominant position over the past two years. On a positive note, that hasn't been enough to drag the whole market lower. We see the broadening of market leadership as a healthy development for the sustainability of the bull market in stocks.
    • The bigger story, in our view, is that earnings growth for the S&P 493 (subtracting the Magnificent 7) is accelerating after a two-year lull. For the fourth quarter, financials, health care, and real estate are joining the sectors that house the growth stocks (tech, communication services and consumer discretionary) in delivering double-digit profit growth. And the broader index is on track for its highest quarterly earnings increase in three years, with profits growing 17% from a year ago compared with expectations of 12% growth before earnings season started2.
 The graph shows quarterly profit growth for the Magnificent 7 relative to the S&P 500. The gap between the two has started to close.
Source: FactSet, Edward Jones.

International exposure

  • Headlines: Euro-area equities are perennial underperformers
    • The outlook for the euro-area stocks has been challenged by several years of anemic growth, low productivity, and, more recently, trade uncertainties. Germany, which accounts for 30% of eurozone GDP, has been particularly hurt by the slump in manufacturing. More broadly, international stocks have lagged U.S. stocks in eight of the past 10 years, with 2024 marking the largest underperformance since 19981.
       
  • What's Unfolding: Major indexes are reaching fresh highs
    • We are hesitant to make the case that the year-to-date rally in European stocks is the start of a new trend, but the vast divergence between the negative narrative in the headlines and positive price action is raising our antennas. The German DAX is up 13% so far this year, and the broader Stoxx 600, a proxy for European large-cap stocks, is up 10%, both outperforming the S&P 5002.
    • Stronger trends in consumer spending and corporate profits suggest that U.S. equities might maintain a leading position in 2025. But there are some potential positive catalysts that, if realized, may brighten the outlook for Europe. A push for a peace agreement to end the Russia-Ukraine war would lower energy prices. Also, the upcoming election this month in Germany may result in looser fiscal policies.
    • We believe that investors should maintain a strategic allocation in international stocks, as they play an important role in diversifying portfolios, especially when considering the heavily discounted valuations and attractive dividend yields relative to U.S. equities.
 The graph shows the relative performance of international relative to U.S. stocks. After lagging last year, international stocks are off to a good start this year.
Source: Bloomberg, Edward Jones. MSCI ACWI ex. U.S. Index and MSCI USA Index.

Portfolio considerations

While stocks have been moving sideways for the past three months, as they've had to absorb news about increasing AI competition, tariffs, and a hotter-than-expected CPI, they remain well supported by positive fundamentals. Headline volatility will always be present, especially this year, but investors will be served well by separating the signal from the noise.

Under the hood, leadership is shifting, which is a positive development for diversified portfolios that stand to benefit from sector, style and geographic rotations. We recommend investors use pullbacks to add to cyclical, value-style, mid-cap, and international investments if they are underrepresented in portfolios. We would also view any rise in the 10-year Treasury yield above 4.5% as an opportunity to extend duration of portfolios and lock in attractive yields.

Angelo Kourkafas, CFA
Investment Strategist

Sources: 1. Bloomberg 2. Factset

Weekly market stats

Weekly market stats
INDEXCLOSEWEEKYTD
Dow Jones Industrial Average44,5460.5%4.7%
S&P 500 Index6,1151.5%4.0%
NASDAQ20,0272.6%3.7%
MSCI EAFE*2,4352.1%7.7%
10-yr Treasury Yield4.48%0.0%0.6%
Oil ($/bbl)$70.67-0.5%-1.5%
Bonds$97.700.2%0.8%

Source: FactSet, 2/14/2025. Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results. *4-day performance ending on Thursday.

The week ahead

Important economic releases this week include S&P Global PMI data and building permits for January.

Review last week's weekly market update.


Angelo Kourkafas

Angelo Kourkafas is responsible for analyzing market conditions, assessing economic trends and developing portfolio strategies and recommendations that help investors work toward their long-term financial goals.

He is a contributor to Edward Jones Market Insights and has been featured in The Wall Street Journal, CNBC, FORTUNE magazine, Marketwatch, U.S. News & World Report, The Observer and the Financial Post.

Angelo graduated magna cum laude with a bachelor’s degree in business administration from Athens University of Economics and Business in Greece and received an MBA with concentrations in finance and investments from Minnesota State University.

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Important Information:

The Weekly Market Update is published every Friday, after market close. 

This is for informational purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation. While the information is believed to be accurate, it is not guaranteed and is subject to change without notice.

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