Resources/Weekly Insights

Volume 14, Edition 5 | February 16 - February 22, 2025

Nice Quarter?

Doug Walters, CFA

Companies are reporting yet another strong quarter of earnings, but at the same time, cracks are appearing in the future outlook. While predicting the future with accuracy is not possible, evidence-based investors can prepare for it.

Contributed by Doug Walters, David Lemire, Max Berkovich, Matthew Johnson

Corporate “earnings season” is well underway. As a former stock analyst on Wall Street, I know this time of year all too well. While it is important work to sift through the minutiae, pull out the few unknown nuggets hiding within the reams, and feed it to the information-hungry market… I don’t miss it. I’ll be quite alright if I never have to hear another analyst on an earnings call cozy up to management by declaring, “Great quarter guys…” I much prefer analyzing the big picture, which is currently (and almost always) sending mixed messages.

Over 85% of the companies in the S&P 500 have reported their Q4 2024 earnings. Of them, 77% “positively surprised” (i.e. beat the earnings expectations that analysts had for them). That is not unusual. Executives are good at setting the bar just low enough so they can comfortably hop over… leading to many “great quarters.” Earnings growth for the whole of 2024 was roughly 10%, up a bit from what was expected at the end of Q3. Looking forward to 2025, current estimates are for over 12% growth. While that sounds great, those expectations are falling… hence the mixed bag.

Paraphrasing the general message from companies: near-term strength, with future uncertainty. The new administration is moving fast on policies that impact companies, like tariffs, immigration, taxes, regulatory frameworks, geopolitical allegiances, and government agency reorganizations. Companies appear particularly concerned about tariffs and their impact on profits and inflation.

We share the uncertainty about tariffs. They could be merely a bargaining chip for greater leverage in our trade negotiations (which has been hinted). Or they could be more lasting with the goal of domesticating manufacturing (which has been hinted). For now, inflation is caught in the crosshairs which has equity investors seeing a bit of red this week.

For long-term investors contemplating what to make of this uncertainty, we would advocate patience first and foremost (there’s a reason it is the first in our Guiding Principles). Nothing good in investing comes from rash decisions. You cannot predict what will happen, what you can do is prepare. At Strategic, we prepare through true global diversification, seeking opportunities in assets that appear relatively attractive, and looking continuously for moments to opportunistically rebalance (systematically selling high and buying low). It is not sexy by design… it is a series of evidence-based decisions designed to tip the odds in our favor over time.

50.4

PMI Composite

The latest Purchasing Manager’s Index (PMI) data came in at 50.4 well below the expected 53.0.

49.7

Services PMI

The Services component was the source of the shortfall, falling into contraction territory (below 50).

Headline of the Week

Weakness Meets Uncertainty

This week saw a few waves of economic weakness wash up on our shores. The latest purchasing manager reports, or PMI’s generally disappointed, housing continues to limp along and now consumer confidence is wavering. All of this has occurred at a time of heightened uncertainty out of Washington. To tariff or not to tariff is a constantly evolving question.

Markets have the capability to manage weakness and even disappointment, uncertainty can be more troubling. For now, equity markets remain somewhat patient, but extended policy uncertainty could test that patience.

The Week Ahead

A light week, with an inflation report and an earnings report from a Wall Street darling on the docket.

Consumption Junction

The Personal Consumption Expenditures Index (PCE) out on Friday is the main economic data point for the week.

PCE is expected to rise by 0.4% for the month of January, which would be an unwelcome number, moving higher than in the previous few months.
Core-PCE, which excludes food and energy, is also expected to run hotter than the recent trend.
If the expectations come to fruition, getting the year-over-year inflation down to 2% becomes even harder, and thus keeping further rate cuts in doubt.
The other economic report of note is a revision to the 4th Quarter Gross Domestic Product, however, it is not expected to show any meaningful revisions from the previous release.

Oh Well!

Nvidia, the face of the AI boom, reports earnings on Wednesday.

Exceptions are sky high, with a 72% increase in revenue from the same quarter last year, driven mostly by the data center segment and its new graphic processing chip, Blackwell.
The results may not be as important as guidance for next quarter, which is predicted to be over $40 billion in revenue, with a gross margin of over 72%.
Nvidia has had a habit of delivering guidance above expectations so the same is whispered again.
Market implied volatility in the stock stands at a move of 8% in either direction.
Dell and retailers Home Depot, Lowes, and TJX are due next week as well.

About Strategic

Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on total client assets of over $2 billion.

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