Back to basics

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   By Guest Blogger Ryan Lewenza

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In recent posts we’ve been focused on Trump and his tariffs. Personally, I need a break from this topic for my mental health and sanity, especially after his recent comments that Canada is “not a viable country”. That’s beyond offensive and is similar to Putin’s claims that Ukraine isn’t a real country. So, to keep my blood pressure in check, I’m going to get back to our bread and butter and discuss the markets.

You would think with all the talk of tariffs stocks would be down this year, but the global equity markets are doing just fine. Currently, the S&P 500 and TSX are up 3-4% while international stocks (EAFE) are up over 8%. Maybe the equity markets are anticipating the tariffs won’t actually get implemented as countries get ready to make deals, or that the tariffs won’t be as draconian as Trump’s threatening. Either way, there’s been some positive developments that add to our confidence that markets could post a third year of gains.

First, we got a positive ‘hit’ from the January Barometer. Way back in 1972, Yale Hirsh, a market analyst and creator of the Stock Trader’s Almanac, uncovered an interesting market observation. When the S&P 500 was positive in January, the S&P 500 posted a positive full year return 86% of the time. Now, on average, the S&P 500 is up 70% of the time, but still, with odds rising to 86% that markets will be positive, this does portend well for this year.

There is a well-known market expression from this, which is, “as goes January, so goes the rest of the year.” Let’s hope this good market statistic hits home again this year. By the way, on average the S&P 500 gains 16% in years when January is positive. Given the big gains from the last two years and the higher valuations, we’re not expecting that big of a year, but we are calling for a third potential year of gains.

Second, key to this is our positive outlook for corporate earnings, which was reinforced with the strong Q4/24 earnings season. Were about three-quarters of the way through the Q4 earnings season and the results are coming in better than expected and adding to our confidence that corporate earnings should be strong this year.

Let’s review some stats and key takeaways from the Q4 earnings.

With 77% of companies in the S&P 500 having reported results so far, 76% of the companies have reported results above analysts’ expectations. This is what we call a ‘beat rate’, and you always want to see a high number as it shows that companies are reporting stronger results than the analysts and markets expected.

Based on the companies that have reported so far, S&P 500 earnings are up an impressive 16.9% yoy which will mark the highest quarterly earnings growth since Q4/21. As of Dec 31st, analysts were forecasting Q4 earnings to rise 11.8%, so at 16.9%, companies have surpassed analysts’ estimates by over 5%.

Additionally, companies are seeing margins improve which is partly why earnings have been a lot stronger. Net profit margins, which is net income divided by sales, or the net percentage companies earn after accounting for all expenses, rose to 12.5% in the quarter, up from 11.3% a year ago. This was a big reason why we saw earnings improving this year. With lower interest rates, inflation and wage growth slowing, we thought this would flow to the bottom line through higher margins for companies, which is playing out nicely.

Overall, a great earnings quarter and it should continue for the remainder of the year. For the next two quarters S&P 500 earnings are forecasted to rise 8% and 10%, respectively, and for the full year, S&P 500 earnings are projected to be up 12.7%. This is impressive and a big positive for the equity markets this year.

S&P500 earnings foreast to rise 12.7% y/y

Source: Bloomberg, Turner Investments

Third, another positive we’re seeing is that market breadth is improving. Over the last few years, it’s been all about the ‘Magnificent 7’ stocks like Nvidia, Meta and Apple. This year some of the shine is off with a few of these stocks down so far (Tesla the worst at -12%). But we’re seeing value stocks up, 10 of the 11 US sectors are positive so far with financials and energy doing well.

Another indicator we track for market breadth is the advance/decline line, which measures the number of stocks advancing versus declining. We’re seeing new highs on this indicator, another sign that markets are broadening out, which is a another positive for the markets.

Finally, we’re in the first year of a US presidency and historically this has been good for stocks. On average, since 1929, the S&P 500 has returned 10.4% in the first year of a president’s term. And interestingly, 9 of the last 10 first years have been positive with the lone outlier being 2001.

Admittedly, this year could be like no other we’ve seen in a long time with Trump in power and his big plans. We stressed in our market outlook that it was going to be a bumpy year, in part due to Trump. But it’s been a decent start so far, and if history repeats as we’ve outlined today, then, maybe our market prediction will come true for a third year of gains. Wouldn’t that be nice!

S&P 500 returns during 1st year of a presidency

Source: Bloomberg, Raymond James Strategy

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Investment Advisor, Private Client Group, of Raymond James Ltd.

Source: https://www.greaterfool.ca/2025/02/22/back-to-basics/