Earnings season so far has recorded the strongest year-over-year earnings growth since 2021. Revenue and earnings beat rates are solid but share price reactions have been muted. Instead, investors are focused on outlooks which are starting to sour. This is of concern to us. Guidance raises have been relatively infrequent but have been massive outperformers. The bar is high as earnings are expected to rise 14.8% in 2025 (source: FactSet).
Tariffs are a fluid situation as the trade wars with Mexico and Canada are on at least 30-day holds. On Sunday the White House announced 25% tariffs on steel and aluminum imports. And the tariff war with China is on. The most likely sources of disruption will be among those businesses with integrated cross-continent supply chains, such as automakers and select industrials. There are so many moving pieces that any true fundamental analysis is nearly impossible. Investors remain concerned that President Trump will keep future tariffs in his back pocket (for now). However, if developments hint at eventual reconciliation we would not be surprised to see new stock market highs soon.
What was the effect of the 2018 trade war? Academic research suggests that nearly 100% of the 2018 tariffs were passed through to consumers, but because of a strong economy, those costs turned out to be rounding errors in a large and prospering economy. We may be looking at a similar situation today.
FIVE YEAR ANNIVERSARY OF PRE-COVID PEAK
Next week (February 19th) marks the five-year anniversary of the pre-Covid peak for the S&P 500. The period from the post-Financial Crisis low in 2009 to the 2020 high was one of the longest and most profitable bull markets in history, up 401%. It took a dramatic shock to stop it but derailed it was. The S&P 500 fell 33.9% in 23 trading days during February and March of 2020 as economic activity around the world was shuttered. GDP fell 5.5% annualized in Q1 before crashing 28.1% annualized in Q2. The unemployment rate went from 3.5% in February to 14.8% in April as the entire economy collapsed with stay-at-home orders and a shock to spending.
However, by August of 2020 the market was back at all-time highs. By the peak in January 2022, the market had more than doubled off 2020 lows. Is there a lesson there for long-term investors? Yes, stay the course as uncomfortable as it may be during volatile periods.
Emergency monetary and fiscal policy unleashed unprecedented support for households and businesses alike. The tide of stimulus was enough to keep the economy going until the U.S. could adapt to the risks of the Covid virus. By March, multiple vaccines were already in human trials.
The Covid pandemic was truly a lesson in how vulnerable markets are to novel situations (black swans), and how powerful and important policy can be in addressing those vulnerabilities.
Fast forward to October 2022 when the short 2022 bear market ended. A new technology sparked a new bull market which is alive and well today. ChatGPT was released on November 20, 2022, which kicked off the current AI boom that has taken the world by storm. Many tech and AI stocks have soared but the equal-weight S&P 500 is up only 17% since then and the equal-weight NASDAQ is up 32%. This shows the broader market is not in a bubble, in our view, and has plenty of room to run.