Market Note – January 7, 2025

By Hightower Great Lakes on January 7, 2025

Welcoming the New Year

Economic data has shown little sign of a slowdown heading into 2025. Over the past two shortened holiday weeks, labor market data has remained steady.

Initial claims came in below expectations and averaged 215K/week, and continuing claims hit its lowest level since September 2024. In housing, pending home sales grew m/m and were up 6.9% y/y in November, all while mortgage rates are near 7%.

Manufacturing data has been a weak spot over the last several months, but ISM Manufacturing data beat expectations with a reading of 49.3 versus a consensus of 48.5.

The headline print is still in contraction, but the new orders and production segments were in expansionary territory and grew in December, with readings of 52.5 and 50.3, respectively.

We believe that similar to 2023 and 2024, 2025 will continue to see above-trend economic growth, but not as strong as the past few years.

To put it simply, there will not be as much fiscal stimulus under the Trump administration (such as +3% economic growth) as we have seen over the past two years.

That said, the incoming administration is pro-growth through lower taxes and deregulation and as a result, we think GDP growth will still likely be above-trend, but closer to 2%.

This above-trend growth will be supportive of mid-single-digit earnings growth and ultimately higher equity markets. There is also a good chance margins will remain expansionary which could provide an upside to high-single-digit earnings growth. 

The setup for 2025 is high, especially given that the S&P 500 has appreciated +20% over the past two years and is up +20% in four of the last six years. For reference, the long-term average return for the S&P 500 is 7.7%. We would be surprised if we saw another year of +20% growth in 2025, but any return above 7.7% is positive.

Chart 1: Continuing and Weekly Jobless Claims Both Hit Multi-Month Lows to End December[1]

Two-Pronged Approach in 2025

In 2025, our two-pronged approach starts with adding on pullbacks to sectors and stocks that have strong fundamentals, which in our view are financials (XLF) and consumer discretionary (XLY).

In a second Trump administration, less regulation will lead to more deal flow, initial public offerings, and a steeper yield curve. To note, the major banks have not seen a steep yield-curve environment over the last several years and it should be a positive force for the industry in 2025.

In addition, capital markets activity is poised to expand, along with double-digit fee growth. In the consumer discretionary sector, we expect the consumer to remain strong owing to a solid labor market and above average wages. Services should continue to be strong as well, which is 70% of consumption.

From the earnings calls we have listened to, there has been no material weakness in consumer activity, and we believe with lower inflation, a balanced labor market, and an expanding economy, the consumer will continue to be a bright spot – which is 75% of U.S. GDP.

The second part of the puzzle is adding to beaten down laggards, being energy (XLE) and healthcare (XLV). Specifically in energy, Schlumberger (SLB) is down -25% in the past year and trades at 11x price-to-earnings for the #1 oil field services company with a 3% yield. The company is growing EBITDA by 20-25%, with EBITDA margins in the mid 20%.

Its strategic focus on digital software and technology supports higher margins over time; SLB announced last September that it will be partnering with Nvidia (NVDA) to service the specific needs of the energy industry, including subsurface exploration, production operations, and data management.

They mentioned this will “help unlock the full potential of generative AI for researchers, scientists and engineers… enabling them to interact with complex technical processes in new ways to drive higher value and lower carbon outcomes”.[2]

In healthcare, Eli Lilly and Company (LLY) is down -18% from its highs and is the #1 player in weight loss and diabetes. In the previous quarter, LLY grew total revenues by 42% y/y, with promising growth in two of its most popular products, Mournjaro and Zepbound.

Fixed Income

Heading into year-end, U.S. Treasuries soared across the curve due to new inflation data, deficit concerns, and uncertainty around economic policies from the incoming Trump administration.

Last week, the Treasury curve reversed some of December’s bear steepening with the 2-, 10-, and 30-year yields falling 5, 3, & 1 bps, respectively.

Spreads recorded mixed moves across credit ratings as investment grade spreads widened 2 bps to +120 bps and high yield spreads tightened 10 bps to +310 bps.

For the first week since November, U.S. credit ratings improved as the main rating agencies issued six upgrades and two downgrades. Within those changes, energy had the most upgrades, while consumer staples had the most downgrades.

Even though the last two weeks were both shortened by the holidays, net flows into fixed income ETFs maintained a steady pace, pulling in $4 billion in the week ending December 27th and then adding $4.7 billion last week, marking the 27th consecutive week of inflows. Tax-exempt yields followed Treasuries, with yields falling 4-5 bps across the curve.

The Week Ahead

Earnings – Friday: DAL, STZ, WBA.

Economics – Monday: PMI Services, Durable Orders, Factory Orders; Tuesday: ISM Services, JOLTS Job Openings; Wednesday: ADP Employment Survey, FOMC Minutes, Consumer Credit; Thursday: Initial Claims, Continuing Jobless Claims, Wholesale Inventories; Friday: Hourly Earnings, Manufacturing Payrolls, Nonfarm Payrolls, Unemployment Rate, Michigan Sentiment.

Return for Selected Indices^[3]

Click here to read last week’s Market Note (12/17).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: FactSet. As of January 5, 2025.

[2] Source: SLB. As of September 19, 2024.

[3] Source: Bloomberg. As of January 6, 2025.