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The Weekend Edition # 158 - Three trends for Equities
Ayesha Tariq
January 26, 2025
Welcome to another issue of the Weekend Edition!
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Here's what we cover
Market Recap - Best inauguration week
20 Jan - 24 Jan 2025
Stocks just closed out one of their best presidential inauguration weeks ever. This shouldn’t come as much of a surprise because we knew going into the inauguration that President Trump has always been a businessman at heart and the performance of the stock market is important to him. As expected, he downplayed the risk of tariffs, and talked about tax cuts to ameliorate the worries the market had.
Next week will be heavy. On the Macro front, we have the FOMC Meeting, 4th Quarter GDP growth numbers, and PCE inflation numbers. On the micro front, we have a host of major earnings for the US Markets, so we’re likely to see quite a bit of volatility again.
We’re also waiting for confirmation of Scott Bessent as US Treasury Secretary, which is due to happen on Monday. The market will be eager to hear about his views on what comes next in terms of the tenor of treasury issuances and the federal government debt.
Commodities
Oil prices fell after President Trump’s Davos address, where he called for lower prices by urging OPEC and Saudi Arabia to increase output, aiming to pressure Russia and end the war in Ukraine. However, OPEC’s alignment with Russia through OPEC+ and Saudi Arabia’s fiscal breakeven oil price of nearly $91/bbl make this challenging.
Further sanctions on Russia are causing some of the spike in oil prices. The geopolitical premium has increased also because of threats of lower Iranian production.
US crude oil inventories also fell for the ninth consecutive week, reaching the lowest levels since March 2022, despite refinery maintenance reducing crude inputs. This put a bit of a floor under prices. Meanwhile, NatGas storage declines were lower than expected, and that’s causing prices to pull back somewhat.
While oil prices caused a pull back in commodities overall, agricultural commodities continue to rally. We can see this in a comparison between DBC (Commodity ETF) vs. the DBA (Agriculture ETF).
Macro - Three trends for the next quarter
While there were a number of executive orders signed in the very first days, there still remains some confusion on how tariffs will be implemented, and the impact that lower immigration will have on the economy. We think lowering immigration could lead to a wage spiral to some extent, keeping core inflation sticky.
The extensive discussions on tax cuts mean that there will be less revenue coming into the Federal government, and this certainly needs to be balanced with some spending cuts. Absent spending cuts, we think that the long end of the US Treasury yield curve will continue to steepen, driven by inflationary pressures. This will continue to put some relative pressure on equities.
Spending cuts, however, are not positive for equities either. We know that the major reason equities rallied even in the face of the Fed’s aggressive rate hikes, has been the abundance of liquidity stemming from government spending.
This brings us to the Fed. We’re doubtful of a Fed cut this month, and after the recent meeting in December, it’s clear that the Fed is taking a more cautious approach to easing.
The question over the next few weeks will be: Can President Trump coerce the Fed into lowering interest rates, as he has proclaimed?
We don’t think that he can, or should.
The Fed has already cut rates by 100bps, and financial conditions have remained relatively easy. While we still don’t have clarity on many of Trump’s policies, we’re inclined to believe that there will be inflationary pressures stemming from lower immigration, and higher tariffs.
There is no clear picture of the resolution of the US Federal Government Debt levels, and absent a path to resolution we think that the long end of the US Treasury yield curve will continue to steepen, putting pressure on equities.
3 Trends for Stocks in the Next Quarter
As longer-term rates in the US continue to remain high, we may see some correction in US equities. Nevertheless, we think these dips could be bought because of three trends that could eventually support equities:
Private spending may fill the gap of lower government spending, as business optimism has returned with Trump back in office
Improvements in productivity are gradually making their way through the economy, in part due to the implementation of AI
Improvements in company earnings are broadening out. While the Mag 7 continues to remain a significant contributor to the overall earnings growth picture, we’re gradually seeing a shift where the rest of the 493 companies in the S&P 500 are gaining earning traction. In fact, even the AI narrative is already broadening out beyond these 7 companies.
Closing Thoughts - Under pressure!
Inflation expectations have increased, and part of the reason for this is the pain people felt in the past few years. The Fed was late to react to the surge in inflation, and that’s still a fresh wound. The Fed knows this as well, and it’s quite likely, they will tread more carefully.
They’ve already seemingly made a mistake by cutting faster than expected based on the idea of a deteriorating labor market - an idea that has now been proven wrong to a large extent.
We think for this meeting, Fed Chair Powell will maintain somewhat of a stoic stance, not wanting to comment further on the path of rate cuts. It’s quite likely that he will continue to talk about the Fed’s independence when asked about President Trump’s comment on lowering interest rates.
Have a safe trading week out there!
Sincerely yours,
Ayesha Tariq, CFA
There’s always a story behind the numbers.
Calendars
US Earnings Calendar
US Economic Calendar in Eastern Time (Source: Trading Economics)
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