Research.LeutholdGroup

December’s Core CPI figures we’re cooler than expected. Markets reversed out some of the damage caused by Friday’s hot jobs report. The market is pricing in only one or two Fed cuts in 2025, down dramatically from this fall.

Read this week's Major Trend. 

New Years Eve 2024 was a party to remember for the 4% Club (stocks with a minimum 4% weight in the S&P 500). Thanks to December’s ridiculously top-heavy performance, a record five firms toasted the new year in the VIP-only Club (Chart 1). For most of the past five years, membership had been limited to two or three companies. Before that, the Club’s March 2000 high-water mark of three firms seemed unobtainable—and, with a little hindsight, a laughable signpost of the Tech Bubble. Well, who’s laughing now?

In the theme that’s reminiscent of all but a few of the last 16 years, the optimal strategy for equity managers and asset allocators in 2024 was the same: Buy the S&P 500, and then hit the links. There is statistical support for doing exactly same thing in 2025. 

Commemorating the Y2K Tech bubble today is not necessarily premature, since December 1999 was the valuation peak of that bubble—and indeed of all U.S. stock market history. Buying the S&P 500 at the end of the last century might therefore be considered the worst-timed stock market entry ever.

One can’t blame the stock market for not hinting that 2024 was going to be a barn burner. It did. On January 2, 2024, a critical “breadth-thrust” signal was triggered and, true to historical form, SPX delivered a 20%-plus gain through the next twelve months. Notably, an impressive aspect of the breadth-thrust track record remains intact: The index has never registered a 12-month loss after any these signals.

Read this week's Major Trend.

Momentum was the best performing factor for 2024 - and it wasn’t really close. Growth continued to perform better within large caps compared to small caps. Sentiment and growth were also positive while, no surprise, value was negative again.

Over the entire history of this study, the momentum plays of our “Dreams” and “Nightmares” have worked both ways. Like everything else, our Dreams fell short of the Cap Weighted S&P 500 in 2024. However, the spread of Dreams over the Nightmares was fairly impressive.

Overall, most patterns suggest a decent year for global equity markets. Expectations are already very high, though, and that leaves much less room for error. We strongly caution against extrapolating U.S. equities’ 2024 performance into 2025.

Our previous update reported that eight of ten factors outperformed the S&P 500, leading us to hope that maybe, just maybe, the market was broadening out from its narrow focus on mega-cap growth. Those hopes were dashed in the fourth quarter, as only two of ten factors managed to outperform the index.

Read the latest MTI update

Read this week's Major Trend.

A Collateralized Loan Obligation is a special purpose vehicle designed to hold a portfolio of highly leveraged corporate loans in a structure that modifies the risk profile of the underlying loans.  A CLO funds its asset purchases by issuing securities backed by the loan portfolio.  These liabilities are layered in tranches defined by seniority and credit protection, ranging from AAA to B with a final equity buffer at the base of the capital structure.  CLOs have historically been the province of large asset managers, and it is only in recent years that smaller investors have been able to access CLOs simply and easily through an exchange traded fund.  Viewing CLO ETFs as a new option in our fixed income toolbox, we felt a deeper investigation was in order.

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The latest CPI report was largely in line with consensus. The combination of easy monetary and expansive fiscal policy, from both the U.S. and China, materially raises the risk of higher inflation over the next year.

Read this week's Major Trend. 

Sharply rising projections for EPS are a reason this market doesn’t seem quite as bubbly as its price tag suggests. Barring a sudden collapse, 2024 will be just the third year in which forward earnings estimates and the forward P/E multiple both increase by more than 10%.

Big November gains in 2022 and 2023 were clearly kick-off events, while the more speculative backdrop of late 2024 makes the latest November jump look more like a blow-off. Nonetheless, market internals do not reflect a bull that’s ready to top out: The S&P 500 simply has too much companionship at recent highs, including cyclical stocks, financials, and small caps.

The election gave small caps and Financials a boost, but didn’t help value stocks as hoped. Momentum and growth were the main winners within large caps, while no factors worked well among small caps, where more speculative names benefited.

One of the benefits of exchange traded funds is the ability for investors to access complicated or non-traditional strategies in a simple easy-to-trade wrapper. We recently reviewed covered call funds and buffer funds, two option-based positions that are now available through ETFs. This month, we examine another multifaceted security that has recently become easier to obtain thanks to new ETF launches.

Financials had another boost as the sector should thrive under the new administration. Among others, less regulatory oversight and weaker capital controls are apt to improve profitability. Within Info Tech, several industries that contain top AI-beneficiaries have deteriorated; both Semiconductors and Tech Hardware Storage & Peripherals are now rated Unattractive.

Revenues progressed for 75% of S&P 500 companies reporting, but only 60% of those realized gains in operating income. Pretax and net income continued to drop, such that headway in the bottom-line was positive for barely more than half of the firms.

The S&P 500 returned to its winning ways in November, logging its largest monthly advance (+5.7%) in a year; over the last 13 months, the index has a price gain of 44%.  

With the second month of Q3 reporting complete, the ratio of up-earnings to down-earnings was an improvement over the same period last quarter and the highest “two-month” figure in two years. Still, this vignette is hovering in the grey zone of results that aren’t deemed recessionary but are decidedly below average. 

The S&P 500’s estimated bottom-up operating EPS was flat during the second month of Q3 results (Chart 1). With reporting essentially complete, the final Q3 figure will be roughly 1.5% below what was ultimately projected before the quarter’s announcements began. That’s a decent divergence from Q1 and Q2, which came in at 0.7% and 0.3% ahead of their respective “pre-reporting” estimates. The shrinkage in Q3 EPS is more in tune with long-term trends but also marks the end of a nice window of higher results—which is a rarity. Traditional EPS erosion is also evident in the snail trail for the anticipated outcome in Q4 .

Read this week's Major Trend. 

Read this week's Major Trend. 

Information Technology has led the market higher this year, gaining 37% to rank as the leader among all eleven sectors as of November 8th. However, there is a return anomaly within this sector that catches our attention. The S&P 500’s Semiconductor sub-industry has risen 96% while the Semiconductor Equipment sub-industry is up just 9%, miles behind the semiconductor group. The divergence seen in Chart 1 seems hard to fathom given the fundamentally interconnected nature of these two business models.

Read this week's MTI update.

The latest CPI report was largely in line with consensus. Our scorecard shows the trend of disinflation has stalled.

Read this week's Major Trend.

The most notable gainer in last week’s Trump Bump 2.0 was the Russell 2000. That index’s weekly surge of +8.6% was its best since the wild pandemic gyrations of April 2020. Yet, this latest Trump-associated upswing fell short of the Russell 2000’s election-week return of +10.2% in 2016 when Trump was the clear underdog.

In October, we published a new election barometer using the DJIA to predict the winner. It failed! Interestingly, the last time this model did not correctly pick the winner was also a year in which the sitting president, who was eligible to run, declined to do so—in 1968.

We’d expect monthly jobs numbers to confirm a recession, not forecast one. This cycle, though, employment reports have been warning of a downturn for 2½ years. It would be easy to call them misfires, but red flags keep coming. If a soft landing was in store, the jobs numbers should have improved by now. 

Given the beginning of an easing cycle in September and the Trump Trade in October, the lack of steepening in the yield curve is intriguing. While tighter financial conditions are likely a challenge to the steepening move, policy regimes and the term premium are favorable toward further curve steepening.

Based on leading economic indicators, a case could be made for the Fed to cut rates again. Stocks are telling another story: Based on market momentum and valuation, an impending rate cut might be the least justified one in modern history.

Last year ended with an extremely rare nine-week winning streak, and the S&P 500 is still charting extraordinary upside momentum more than 10 months later. Historically, after a one-year stock surge of this magnitude (>35%), the U.S. has never declined into recession over the next 12 months.

Despite outperformance of value and small-cap stocks, actively-managed value and small-cap portfolios both struggled. No style box managed a clear win in favor of active management, which is unusual for such leadership conditions. There are several explanations that can account for this behavior.

With the closely intertwined businesses of semiconductors and semiconductor equipment, it is not surprising that the two industries have historically performed similarly. Yet, in 2024, a colossal disconnect has emerged, with semi-equipment stocks up a paltry 5%, miles behind the booming semiconductors.