Jan. 13, 2025: Look to earnings for sanity in this market

Key takeaways

• Last week’s hotter than expected payroll report called into question the path forward for interest rates, fueling market volatility, with the potential for more on the way.

• Still, earnings season is expected to bring another strong quarter of earnings per share growth for the S&P 500 Index.

• In this environment, areas to consider include cyclicals, small caps, and beneficiaries of the continuing growth of artificial intelligence.

 

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Equities were broadly lower last week with the S&P 500 Index falling 1.94% for its second red week in a row, and its fourth out of the last five.¹ The Russell 2000^® Index was down 3.49% and is now notably below where it was trading before the election. Higher rates and a stronger dollar have continued to weigh on equities as the 10-year U.S. Treasury yield is all the way up to 4.75%, approximately 20 basis points (bps) higher than where it started this year, and about 110 bps higher than when the U.S. Federal Reserve (Fed) first cut the federal funds rate by 50 bps in September. Meanwhile the U.S. Dollar Index has been higher in 14 of the last 15 weeks.

“This is what a higher-volatility bull market looks like, and I believe the reaction to last week’s payroll report is yet another example of what to expect going forward,” said Joey Del Guercio, Research Associate for Market Strategy at Raymond James Investment Management. “It’s no secret that the market’s been running hot, but no part of me thinks this is the end of the bull market.”

That’s because the fundamental backdrop for equities remains constructive, and Del Guercio said he thinks the S&P 500 drawing down nearly 5% is a necessary reset that sets itself up nicely heading into earnings season and the inauguration.

The big story of last week’s shortened trading week was the December payroll report from the U.S. Bureau of Labor Statistics. December nonfarm payrolls came in far hotter than expected:

• Up 256,000 month over month versus an estimated 165,000;

• The unemployment rate fell by 0.1% to 4.1% (versus the consensus expectation of 4.2%); and

• Average hourly earnings were in-line with expectations at 0.3% month over month.

“This was another instance of the data being so good that it’s bad because it calls into question the path forward for interest rates,” Del Guercio said. As one would expect, the futures-implied fed funds rate path shifted meaningfully more hawkish following the report. The day before the jobs report, there was one full cut priced in by June and two priced in by September. After the report, there was just one cut priced in by September. From a very big picture, the jobs report is good news: we have a solid labor market that people were worried about falling apart just a few months ago. Accordingly, the Fed won’t be able to justify further easing based on a weakening labor market. That puts inflation back in the driver’s seat and makes Wednesday’s December Consumer Price Index (CPI) report that much more important in gauging the path forward for interest rates.

“I don’t think we see good news leading to selloffs for too much longer, since the market is now pricing in an amply hawkish Fed,” Del Guercio said. Despite all the macroeconomic noise, he said there are two main catalysts to look forward to in the coming weeks.

First, Donald Trump will be inaugurated as the 47th U.S. president on Jan. 20. This should provide some much-needed certainty to the market, Del Guercio said. The policy uncertainty since the election has had traders (and the Fed) guessing about the implications of potential policy. In one week, the guessing games will be over, and we’ll begin to get clarity on what Trump’s actual policies look like, he said.

Until then, investors can look forward to the banks kicking off 2024’s fourth-quarter earnings season in earnest this week. Currently, the S&P 500 Index is expected to post 11.7% year-over-year (y/y) earnings growth in the quarter, accelerating meaningfully from the third quarter’s growth of 5.9%. The expected 11.7% would mark the index’s strongest growth since the fourth quarter of 2021 (which had the now-absent benefit of comparables from the depths of the COVID-19 pandemic), and Del Guercio said he believes there’s certainly scope for the index to beat this. The S&P 500 has beaten its pre-season earnings per share (EPS) estimates in all of the last seven quarters. In fact, he noted, if you apply the average improvement in earnings growth during the earnings season to the pre-season estimate, fourth-quarter EPS growth could come in closer to 14%.

This earnings season also could be beneficial for breadth, he said, as seven of the S&P 500’s 11 sectors are expected to post positive growth. Six of those seven are expected to post double-digit earnings growth, and five of the seven are expected to post growth outpacing the broader index. Financials are expected to post the highest y/y growth of +39.5%, led by banks (+186%).

“Earnings season should bring some much-needed sanity back into the market as we all refocus back on the fundamentals,” Del Guercio said.

Areas to consider

With waning uncertainty and earnings on the horizon, Del Guercio said investors have reason to feel optimistic about the market getting back on its feet. Still, he continues to expect elevated volatility, mainly centered around economic data releases and what they indicate about the path forward for interest rates. There’s sure to be heighted volatility related to headlines going forward, too. Del Guercio said last week’s Greenland/Canada/Panama triple whammy is a reminder of what the new status quo is going to be. He favors focusing on the fundamentals, thinking about building diversification to help position investment portfolios from heightened volatility, and considering the potential of leaning into long-term secular themes. He believes areas of potential opportunity include:

• Cyclicality. Economic growth continues to hold up better than expected, and the next administration’s pro-growth agenda is expected to be an added tailwind for this economically sensitive cohort, Del Guercio said. In addition to the focus on financials’ earnings growth, he said this week’s earnings reports could provide insight into the capital markets, where the expectation is broadly for increased mergers and acquisitions (M&A) and initial public offering (IPO) activity inspired by a new Federal Trade Commission agenda underscored by deregulation. He said industrials remain a sector to think about considering its exposure to broad economic growth as well as to defense, capital expenditure (capex) spending fueled by the growth of artificial intelligence, and U.S. manufacturing and construction.

• Small caps. Despite continued underperformance, Del Guercio believes the case remains for small caps in 2025. This earnings season is expected to showcase the Russell 2000’s first quarter of positive y/y EPS growth for the first time in years, and 2025 is projected to show the index post EPS growth outpacing the S&P 500. It wouldn’t take much capital to get these companies going, he said: the Russell 2000 is less than 6% of the Russell 3000^® Index, and the five largest stocks by market capitalization in the S&P 500 are nearly five times the size of the entire Russell 2000. Small caps appear to be attractively valued on a relative basis, too, with the five largest stocks by market cap in the S&P 500 trading at about 10x their price/sales ratios versus the Russell 2000’s ratio of approximately 2x price to sales.

• AI 2.0. Last week, the world’s biggest semiconductor foundry reported fourth-quarter revenue growth that came in ahead of estimates at 39% y/y. The proliferation of artificial intelligence does not look to be slowing down, Del Guercio said. Where the last two years have largely seen the AI enablers soar, Del Guercio expects that the future will see AI winners expand to other sectors and industries. He continues to like the AI capex winners related to data center construction/engineering, coolers/servicers, and energy generators/distributors. “It already seems like we’re going to be hearing plenty about ‘agentic AI’ this year, which I believe means it’s time to keep an eye out for the true AI software winners going forward,” he said.

What to watch

Fourth-quarter earnings kicks off in earnest this week with the major banks. Other noteworthy earnings releases include a semiconductor manufacturer and a health insurance company, both on Thursday. The National Federation of Independent Business’s Small Business Optimism Index and the December Producer Price Index come out on Tuesday; December’s CPI on Wednesday; December retail sales on Thursday; and December housing starts and building permits on Friday.

 

¹ Unless otherwise indicated, all data cited is sourced from Bloomberg as of Jan. 10, 2025.

Risk Information:
Investing involves risk, including risk of loss.

Diversification does not ensure a profit or guarantee against loss.

Disclosures:
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce return.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Raymond James Investment Management or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

The views and opinions expressed are not necessarily those of the broker/dealer or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.

Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.

Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The prices of small company stocks may be subject to more volatility than those of large company stocks.

International investing presents specific risks, such as currency fluctuations, differences in financial accounting standards, and potential political and economic instability. These risks are further accentuated in emerging market countries where risks can also include possible economic dependency on revenues from particular commodities or on international aid or development assistance, currency transfer restrictions, and liquidity risks related to lower trading volumes.

Definitions
Agentic artificial intelligence (AI) is a type of advanced AI that can act autonomously, make adaptations as it goes, and address multi-step tasks based on context and objectives with limited human supervision.

Basis points (bps) are measurements used in discussions of interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%.

Breadth describes the relationship between the median and the mean of a market index. When a few data outliers result in a mean that is substantially larger (or smaller) than the median of the full data set, then the performance of the entire index is being driven by a “narrow” selection of companies. An index supported by “broad” market movements is one where the median is closer to the mean.

Capital expenditures, or capex, are monies used by a company to buy, improve, or maintain physical assets such as real estate, facilities, technology, or equipment, and may include new projects or investments.

Comparables, often shortened to comps, carries different meanings depending on the industry and context, but generally entails a comparison of financial metrics – often for two different time periods – or other factors to quantify performance or determine valuation.

A consensus estimate is a forecast of a public company’s projected earnings, the results of a particular industry, sector, geography, asset class, or other category, or the expected findings of a macroeconomic report based on the combined estimates of analysts and other market observers that track the stock or data in question.

The U.S. Consumer Price Index (CPI) measures the change in prices paid by consumers for goods and services. The U.S. Bureau of Labor Statistics bases the index on prices of food, clothing, shelter, fuels, transportation, doctors’ and dentists’ services, drugs, and other goods and services that people buy for day-to-day living. Prices are collected each month in 75 urban areas across the country from about 6,000 households and 22,000 retailers.

Cyclical stocks have prices influenced by macroeconomic changes in the economy and are known for following the economy as it cycles through expansion, peak, recession, and recovery.

A drawdown is a decline in the returns of a security or group of securities, as measured over a period from the peak of returns to their trough.

Earnings per share (EPS) is calculated as a company’s profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company’s profitability.

The federal funds rate is the target interest rate set by the Federal Open Market Committee of the U.S. Federal Reserve. The target is the Fed’s suggested rate for commercial banks to borrow and lend their excess reserves to each other overnight.

The futures-implied federal funds rate offers a projection of the federal funds rate as reflected by futures contracts based on the fed funds rate.

Hawkish, dovish, and centrist are terms used to describe the monetary policy preferences of central bankers and others. Hawks prioritize controlling inflation and may favor raising interest rates to reduce it or keep it in check. Doves tend to support maintaining lower interest rates, often in support of stimulating job growth and the economy more generally. Centrists tend to occupy the middle of the continuum between tight (hawkish) and loose (dovish) monetary policy.

Market capitalization, or market cap, refers to the total dollar market value of a company’s outstanding shares of stock.

The National Federation of Independent Business’s Small Business Optimism Index surveys small and independent business owners on 10 equally weighted and seasonally adjusted variables, including their hiring, investment, and inventory plans, as well as on their economic expectations, assessment of the state of the economy, labor market, credit conditions, and earnings trends. The monthly change of each variable contributes proportionally to the overall monthly change in the index.

The payroll report, officially known as the Employment Situation Summary, is a monthly U.S. Bureau of Labor Statistics (BLS) report tracking nonfarm payroll employment and the national unemployment rate, with data on changes in average hourly earnings, and job trends in public and private sectors of employment. The report is based on surveys of households and employers.

The price to sales ratio (P/S) is calculated by dividing a company’s market capitalization by the revenue in the most recent year.

The Producer Price Index (PPI), published monthly by the U.S. Bureau of Labor Statistics, measures the average change over time in the selling prices received by domestic producers for their output.

Secular trends are large-scale and ongoing changes in economies and societies that have the potential to drive broad and lasting economic, technological, social or other kinds of changes.

Tailwind is a term used to describe events or market forces that exert a positive influence on an investment’s performance.

Indices
The S&P 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 80% of the investable U.S. equity market.

The U.S. Dollar Index is a measure of the value of the U.S. dollar relative to the value of a basket of currencies from most of the U.S.’s most significant trading partners.

The Russell 2000^® Index measures the performance of the 2,000 smallest companies in the Russell 3000^® Index, which represents approximately 7% of the total market capitalization of the Russell 3000^® Index.

London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ©LSE Group 2024. FTSE Russell is a trading name of certain of the LSE Group companies. Russell^® is a trademark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor, or endorse the content of this communication.

 

M-667984 Exp. 5/13/2025

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Jan. 6, 2025: Positioning for a V.A.S.T. range of outcomes in 2025

Key takeaways

• 2025 is setting up to include more pronounced bouts of market volatility.

• That, however, does not change the solid fundamentals or range of tailwinds that this bull market is grounded in.

• Matt Orton, CFA believes that heightened volatility makes a strong argument for considering the benefits of a more diversified portfolio, with potential opportunities in a few key areas.

 

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Now that the market has closed the chapter on 2024, it starts the new year with elevated caution following the second consecutive year of 20%-plus gains for the S&P 500 Index.¹

Despite a challenging December, the S&P 500 still returned 25% last year, driven by factors that include:

• A continued run in technology names tied to artificial intelligence,

• Easing financial conditions and the start of the interest rate cutting cycle,

• Continued earnings growth and strong profit margins, and

• Economic resiliency.

Looking forward, however, many of these drivers seem to be well priced into the market, said Matt Orton, CFA, Chief Market Strategist at Raymond James Investment Management. Some are even turning into headwinds as the strength of the market and the resiliency of the economy force the U.S. Federal Reserve (Fed) to slow or even pause rate cuts. The backup in rates and changing Fed narrative have fueled recent market weakness and could pose a serious challenge to future gains if the 10-year U.S. Treasury yield continues to push toward 5%, he said.

“While these are very real headwinds — we also can’t forget about the unknowns around future policy and geopolitics — I do not think they derail the long-term bull market, and I continue to believe that the ultimate path for the market is higher,” Orton said.

One of Orton’s key expectations in 2025 is for more pronounced periods of volatility moving forward, and he sees December as a preview of that.

“I believe this higher-volatility bull market is a strong argument for better diversification as I expect the rising tide won’t lift all boats,” he said. “But I do think it could provide investors who are considering diversification with better entry points to make potential changes to their portfolios. Rather than fear the volatility, we should embrace it. I suggest investors take a hard look at their portfolios and consider preparing a shopping list so that they can be ready to use downside opportunistically.”

A higher-volatility bull market is nothing new. In fact, we don’t have to go too far back in history to draw a few useful lessons for 2025. During President-elect Donald Trump’s first term, we saw a period of exuberance starting at his inauguration all the way through the passing of the Tax Cuts and Jobs Act in December 2017. The risk environment became self-fulfilling with tighter credit spreads and lower volatility feeding risk-taking behavior. This culminated in the S&P 500 hitting its most overbought levels in 50 years in January 2018.

Orton said that feels pretty similar to the risk environment for most of 2024, especially in November. The exuberance unwound in 2018, starting first with “Volmageddon,”² a sharp spike in volatility in February 2018, then elevated volatility around tariffs and trade, and finally a 20% drawdown due to a surprisingly hawkish Federal Open Market Committee.

“By drawing these parallels, I’m not suggesting that we’ll see a 20% Fed-induced crash,” Orton said. “I do, however, think that there are increased risks of disorderly drawdowns like we saw throughout 2018 as we unwind similar levels of excess. We’ve already seen a few volatility events in the second half of 2024, and I expect that we’ll see that pattern of episodic volatility continue and increase in 2025. And, just like we saw for most of 2018, I expect that the market will recover from each event and push higher.”

Why does Orton believe that the path is ultimately higher? That largely rests on the fact that the bull market is grounded in solid fundamentals with a myriad of tailwinds behind it, he said. While December was quite negative for market breadth, he said it has slowly been expanding under the surface, catalyzed by strong and broadening corporate earnings and resilient margins. The S&P 500’s earnings growth is expected to accelerate in 2025 with the S&P 493 expected to contribute more to headline growth than the Magnificent Seven. Policy is stimulative and is expected to get more stimulative in the coming years considering Trump’s pro-growth agenda and expected plans for deregulation, he said.

The good news regarding the Fed is that the market has rapidly repriced interest rate cut expectations, with the consensus now estimating between one and two cuts in 2025. While some stickier inflation reports could cause a further spike in interest rates, Orton doesn’t think such moves are sustainable and could present opportunities for long-term investors.

This will be an important week for the market given some critically important data releases and where the market goes from a technical crossroads, Orton said. The sideways price action and bounce on Friday brought short-term technical indicators out of deeply oversold territory while the market is no longer overbought on a longer-term perspective, he said. The percentage of S&P 500 components trading above their 10- and 50-day moving averages rebounded last week, with the percentages rising to 50.89% and 24.10%, respectively. This is the first time in a month that more than half of the S&P 500’s components have been trading above their 10-day moving averages. That is encouraging, but Orton believes the market needs to see more follow-through this week or it risks a prolonged period of malaise or even more downside.

Orton’s investment playbook

A client recently asked Orton if he had an acronym that captures the key facets of his investment outlook for 2025.

“The question took me by surprise,” he said, “and I didn’t think there really was a single word that could capture both the diverse risks investors face as well as the attractive areas of opportunity. But as I thought about the ‘known unknowns’ we face in 2025 and the vast range of outcomes, I realized the word was right in front of me.”

Think V.A.S.T. — as in:

• Volatility — Be prepared for an uptick in volatility and an increased risk of disorderly selloffs like we saw over the summer in the unwinding of the yen carry trade or during Volmageddon in 2018. This doesn’t mean there’s a need to be overly defensive or to reduce risk, Orton said. Quite the opposite. He believes the fundamentals underpinning this bull market remain firmly in place, and consequently his playbook favors having a properly diversified portfolio across asset classes, geographies, and market capitalizations.

• Artificial intelligence — Orton doesn’t think the AI trade is slowing down. To him, that suggests the importance of thinking about leaning into the megatrends that he believes are likely to lead earnings growth next year and beyond. In addition to the hyperscalers, he said there are so many other opportunities for 2025 that are levered to the AI trade. He calls this the “AI 2.0” basket of companies that are enabling the AI revolution, including those focused on providing power, cooling solutions, and construction and engineering capabilities for the growth of data centers and semiconductor fabrication plants.

• Small caps — December was one of the worst months for small caps in history, but Orton believes that only creates a better entry point for investors who thought they missed the trade following the election in November. He considers both small and mid caps to be attractive on a relative basis and generally under-owned in investor portfolios. Funding costs at small-cap companies have already come down given the 100 basis points of rate cuts that have already occurred, he said.

• Trillion-dollar club — The success of the largest companies in the market will be important for overall index returns, Orton said. He continues to expect that we’ll see more broadening, but that doesn’t mean many of these names can’t do well. He thinks the business models of these companies are remarkably strong, and the companies generally screen as very high quality. Better diversifying a portfolio doesn’t mean rotating out of mega-caps, he said. Rather, it means being conscientious about how large a position they occupy in your portfolio and thinking about taking steps to have exposure to a broader basket of assets.

What to watch

A barrage of key economic data this week culminates Friday with the U.S. Bureau of Labor Statistics’ payroll report for December. We also get durable goods orders and Services ISM^® Report on Business^® data throughout the week. The minutes from the Federal Reserve’s mid-December meeting are released on Wednesday, and at least six Fed policymakers are scheduled to speak publicly this week.

Overseas, traders will be watching China’s Consumer Price Index and Industrial Sector Producer Price Index as well as aggregate financing data for signs that recent stimulus measures are starting to have the desired impact on the economy. Japanese wage growth and Australian inflation figures are also due.

Washington will also remain in focus. Now that the House speaker election is past, the market will look for any updates with respect to the pace and magnitude of policy changes following Trump’s inauguration on Jan. 20.

 

¹ Unless otherwise indicated, all data cited is sourced from Bloomberg as of Jan. 3, 2025.

² Volmaggedon is a combination of the words “volatility” and “Armageddon.”

Risk Information:
Investing involves risk, including risk of loss.

Diversification does not ensure a profit or guarantee against loss.

Disclosures:
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce return.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Raymond James Investment Management or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

The views and opinions expressed are not necessarily those of the broker/dealer or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.

Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.

Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The prices of small company stocks may be subject to more volatility than those of large company stocks.

International investing presents specific risks, such as currency fluctuations, differences in financial accounting standards, and potential political and economic instability. These risks are further accentuated in emerging market countries where risks can also include possible economic dependency on revenues from particular commodities or on international aid or development assistance, currency transfer restrictions, and liquidity risks related to lower trading volumes.

Definitions
Basis points (bps) are measurements used in discussions of interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%.

Breadth describes the relationship between the median and the mean of a market index. When a few data outliers result in a mean that is substantially larger (or smaller) than the median of the full data set, then the performance of the entire index is being driven by a “narrow” selection of companies. An index supported by “broad” market movements is one where the median is closer to the mean. Market breadth is said to narrow when a smaller number of more extreme outliers drive the mean of an index further from its median.

A carry trade involves borrowing money in countries where interest rates are low and using the funds to make investments in countries with high interest rates. An unwinding in a carry trade refers to the rush that takes place when many investors leave trade all at once.

The China Consumer Price Index (CPI), released monthly by the National Bureau of Statistics of China, measures changes over time in prices of goods and services in eight categories and 268 basic divisions covering consumption by urban and rural residents, including food; tobacco and liquor; clothing; residential costs; household articles and services; transportation and communication; education, culture, and recreation; healthcare; and other articles and services.

The China Industrial Sector Producer Price Index (PPI) is released monthly by the National Bureau of Statistics of China and reflects the trend and level of prices change when the products are sold for the first time. The survey of industrial producers covers the prices of industrial products in 40 major industrial categories and more than 1,300 basic categories.

A consensus estimate is a forecast of a public company’s projected earnings, the results of a particular industry, sector, geography, asset class, or other category, or the expected findings of a macroeconomic report based on the combined estimates of analysts and other market observers that track the stock or data in question.

A credit spread is the difference in yield between a U.S. Treasury bond and another debt security with the same maturity but different credit quality. Also referred to as “bond spreads” or “default spreads,” credit spreads are measured in basis points, with a 1% difference in yield equaling a spread of 100 basis points. Credit spreads reflect the risk of the debt security being compared with the Treasury bond, which is considered to be risk-free. Higher quality securities have a lower chance of the issuer defaulting. Lower quality securities have a higher chance of the issuer defaulting.

Credit spread tightening refers to the contraction of credit spreads in response to changes in economic conditions that cause a decline in credit risk.

Defensive investment strategies are characterized by rebalancing the investment portfolio regularly to maintain an intended asset allocation. They also typically entail investing in high-quality, short-maturity bonds and blue-chip stocks, diversifying across sectors and countries, and holding cash and cash equivalents in down markets.

The Federal Open Market Committee (FOMC) consists of 12 members: the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining 11 Reserve Bank presidents, who serve one-year terms on a rotating basis. The FOMC holds eight regularly scheduled meetings per year at which it reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth.

Hawkish, dovish, and centrist are terms used to describe the monetary policy preferences of central bankers and others. Hawks prioritize controlling inflation and may favor raising interest rates to reduce it or keep it in check. Doves tend to support maintaining lower interest rates, often in support of stimulating job growth and the economy more generally. Centrists tend to occupy the middle of the continuum between tight (hawkish) and loose (dovish) monetary policy.

Headline measures of economic activity such as price trends or gross domestic product include all economic activity and are often referred to as nominal measures.

Headwind is a term used to describe events or market forces that hinder the prospects for performance in an individual investment or group of investments.

Hyperscaler refers to the largest cloud computing providers that can provide massive amounts of computing resources and storage at enterprise scale

Known unknowns refer to identified areas of potential risk with uncertainty surrounding the timing, scope of impact, or path of development for those risks.

The Magnificent Seven refers to the seven largest stocks by market capitalization in the S&P 500 Index, as of Dec. 29, 2023. Collectively they made up more than 25% of the market capitalization of the entire index. They are Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, NVIDIA and Tesla.

Market capitalization, or market cap, refers to the total dollar market value of a company’s outstanding shares of stock.

Mega-cap stocks are the largest publicly traded companies as measured by market capitalization. Generally, this refers to companies with market capitalizations over $200 billion.

A megatrend is a widespread and long-term macroeconomic, technological, social, environmental, political, or other change that may develop slowly at first but that has a major, ongoing impact once it gets underway. Megatrends are distinct from smaller trends in business, economic, or other spheres of activity that have less far-reaching or enduring effects.

The moving average (MA) is a technical analysis tool that smooths out stock price data by creating a constantly updated average price, often over a specified period of time, such as 15, 30, 50, 100, or 200 days.

Overbought is a term used to describe a security or group of securities believed to be trading at a level above its or their intrinsic or fair value.

Oversold is a term used to describe a security or group of securities believed to be trading at a level below its or their intrinsic or fair value.

The payroll report, officially known as the Employment Situation Summary, is a monthly U.S. Bureau of Labor Statistics (BLS) report tracking nonfarm payroll employment and the national unemployment rate, with data on changes in average hourly earnings, and job trends in public and private sectors of employment. The report is based on surveys of households and employers.

Positioning refers to assessments of whether professional investors are, on the whole, bullish or bearish on a particular security, industry, sector, market capitalization or other area of the market, as reflected by the extent to which they are invested in the area of the market in question.

Quality investing is a strategy that seeks to invest in companies with low debt, stable earnings, consistent asset growth, and strong corporate governance, as reflected in financial metrics such as ratios of return to equity and debt to equity, as well as to earnings variability.

Rotation describes the movement of investments in securities from one industry, sector, factor, or asset class to another as market participants react to or try to anticipate the next stage of the economic cycle.

The S&P 493 refers to the constituents of the S&P 500 Index outside of the seven largest companies by market capitalization.

The Services ISM^® Report on Business^® is produced by the Institute for Supply Management (ISM) and is based on data compiled from purchasing and supply executives in a wide variety of industries nationwide. Survey responses reflect the change, if any, in the current month compared to the previous month in supplier deliveries along with seasonally adjusted business activity, new orders, and employment.

Sticky is a term used to describe measured data that is slow to change, in contrast to faster-changing or more variable data.

Tailwind is a term used to describe events or market forces that exert a positive influence on an investment’s performance.

The Tax Cuts and Jobs Act (TCJA) of 2017 was a sweeping revision of the U.S. tax code that reduced taxes for individuals and businesses. The changes for businesses created a single flat corporate tax rate of 21% and also affected deductions, depreciation, expensing, tax credits, and other tax items that affect businesses. The corporate tax cut is permanent. The individual tax cuts are scheduled to expire in 2025.

Technicals refers to technical indicators of historic market data, including price and volume statistics, to which analysts apply a wide variety of mathematical formulas in their study of larger market patterns.

Unwinding describes the process of closing out what is often a large or complicated trading position.

Volmaggedon is a portmanteau of the words “volatility” and “Armageddon.” It is used to describe a period in February 2018 when market volatility sharply spiked, triggering strong market reactions.

Indices
The S&P 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 80% of the investable U.S. equity market.

The S&P 500^® Equal Weight Index is the equal-weight version of the S&P 500. It includes the same constituents as the capitalization-weighted S&P 500, but each company in the S&P 500 Equal Weight Index is allocated a fixed weight, or 0.2% of the index total at each quarterly rebalance.

 

M-663176 Exp. 5/6/2025

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