1/9/2025 Ross Mayfield Five for Friday

Five for Friday - January 17, 2025

Interest Rates, Earnings, Spending, Energy, and Mega Firms

Rates
Profits
Consumer
Energy
Did you know

1. Rates

As laid out in Strategas' quarterly note, rising long-term Treasury yields are a key tactical risk to the market, as higher yields weigh on business investment and consumer activity (among other things). The recent move higher in yields has pressured stocks, catching markets somewhat off guard as investors expected the Fed’s rate cuts to spur a move lower in yields. But although high yields have weighed on stocks lately, they have not (at least on their own) been a death knell for stocks across history. When a move higher is in part driven by better-than-expected economic data (as was the case last Friday when yields popped after a much stronger-than-expected jobs report), investors should not miss the forest for the trees: a strong US economy is built on a healthy, working consumer. High rates might keep a lid on how far valuations can expand from here, but the fundamental underpinnings of the economy and corporate earnings still look solid.

Interest rates and stock prices: A line chart showing that the S&P 500 has risen at times when interest rates have been high or low, rising or falling.

2. Profits

Although day-to-day volatility can distract from this, the most important factor for the long-term performance of the stock market has been the profitability of the underlying businesses (“in the short run, the market is a voting machine but in the long run it is a weighing machine”). With that in mind, it strikes me as good news that the S&P 500 is expected to report earnings growth of 12% for the fourth quarter of 2024, which would be the best growth rate since 2021. With higher yields and extended valuations, earnings will be expected to carry the load for stock prices in 2025. So far so good.

3. Consumer

According to Adobe, online spending in the 2024 holiday season was 8.7% higher than that same period in 2023, reaching a record $241 billion. Adobe’s analysis (which included more than 1 trillion visits to U.S. retail sites) concluded that the spending spike was driven by more demand, not higher prices, as ecommerce prices have fallen for 27 months in a row. The U.S. economy is ~70% consumption, so focus on the U.S. consumer is warranted. A strong stock market, low unemployment, rising wages, and record levels of home equity are driving both spending and consumer confidence higher. Perhaps more importantly when thinking about systemic risks, debt-to-income ratios remain in check compared to history (unlike, say, 2008). Until this spending story cracks, recession odds remain low.

4. Energy

Stocks and bonds were boosted when core inflation came in below expectations on Wednesday, but overall inflation rose on higher energy prices. Our partners at Strategas have flagged energy policy as a day-one item for Trump, noting that his administration believes that lowering energy prices will bring down inflation, interest rates, and the debt servicing cost of the US. Longer-term actions will focus on ending the wars in the Middle East and Europe; near-term actions include expanding liquified natural gas exports, drilling on federal land, offshore development, and reversing many Biden climate policies.

5. Did you know

that the largest company in the U.S. by assets is not one of the “Magnificent 7” tech giants? Nor is it one of America’s many leaders in oil & gas (e.g., Chevron), retail (e.g., Costco), or Pharma (e.g., Eli Lilly). No, the U.S. firm with the most assets is Fannie Mae, with over $4 trillion in mortgage loans on its books. Ironically, by market cap, Fannie Mae is just 0.23% the size of Apple and is smaller than WingStop, which has just 0.01% of Fannie Mae’s assets. Fascinating!

Disclosures

This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. Market and economic statistics, unless otherwise cited, are from data provider FactSet.

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For investment advice specific to your situation, or for additional information, please contact your Baird Financial Advisor and/or your tax or legal advisor.

Past performance is not indicative of future results and diversification does not ensure a profit or protect against loss. All investments carry some level of risk, including loss of principal. An investment cannot be made directly in an index.

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