Weekend Market Update, Weekly Recap: S&P 500 (1.66%), Dow (2.51%), Nasdaq (2.51%), Russell 2000 (3.71%)

For this market commentary, I want to start by concentrating on current and projected earnings in the market compared to our WealthTrust DBS Long Term Growth Strategy.?

So far this quarter, we have had just one of our companies, 3.5%, miss their research analyst's quarterly earnings estimates compared to 23% for the market.? Our historical average is significantly below the market of 3 to 8%, which is attributable to the utilization of quantitative analysis of our companies' earnings revisions.

As of February 14th, 385 Companies in the S&P 500 have reported earnings. Utilizing our Artificial Intelligence platform, we determined that 300 of those companies, or 78% of them, had positive remarks about future earnings for the remainder of the year. Technology had the most positive remarks and utilities the least. This percent correlates to the historical 5-year average of S&P 500 companies, beating their quarterly estimates of 77%.

At this stage of the fourth quarter earnings season, S&P 500 companies are reporting strong results relative to expectations. Both the percentage of S&P 500 companies reporting positive earnings surprises and the magnitude of earnings surprises are above their 10-year averages. As a result, the index is reporting higher earnings for the fourth quarter today relative to the end of last week and relative to the end of the quarter. In addition, the index is reporting its highest year-over-year earnings growth rate for Q4 2024 in three years.

Overall, 77% of the companies in the S&P 500 have reported actual results for Q4 2024 to date. Of these companies, 76% have reported actual EPS above estimates, which is below the 5-year average of 77% but above the 10-year average of 75%. In aggregate, companies are reporting earnings that are 7.3% above estimates, which is below the 5-year average of 8.5% but above the 10-year average of 6.7%. Historical averages reflect actual results from all 500 companies, not the actual results from the percentage of companies that have reported through this point in time.

This week, US equities experienced broad declines, with weaker sessions on Thursday and Friday reversing earlier gains that had seen the S&P 500 hit fresh record closes on Tuesday and Wednesday. Interestingly, the equal-weight S&P 500 outperformed the cap-weight index by approximately 100 basis points, indicating that the market's losses were more concentrated in larger, tech-heavy stocks. This was underscored by significant drags from tech giants within the "Magnificent 7," including:

• Meta Platforms (META): -7.2%
• Amazon (AMZN): -5.3%
• Tesla (TSLA): -5.1%

Other underperformers included cruise lines, airlines, trucking, managed care, homebuilders, home improvement and housing-linked retail, internet companies, investment banks, money center banks, copper, and aluminum. On the other hand, outperformers included China tech, government-sponsored enterprises (GSEs), pharmaceuticals, toys, dollar stores, food and beverage, cosmetics, energy, and telecom.

Treasuries saw slight firmness across the curve, while the dollar index remained largely unchanged, though yen strength was notable in the foreign exchange market. Gold rose 2.1% for the week, setting a fresh record, while Bitcoin futures fell 2.8%. WTI crude oil was down marginally by 0.2%.

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WealthTrust Long Term Growth Portfolio Weekly Top 10 | ETF: WLTG

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Sector Rotation:

A clear rotation towards defensive sectors was evident this week, reflecting investor caution amid growing uncertainties. The outperformers included:

• Utilities: +1.39%
• Healthcare: +1.07%
• Energy: +1.06%
• Consumer Staples: +0.94%
• Real Estate: +0.44%

Conversely, cyclical and tech-related sectors lagged:

• Consumer Discretionary: -4.30%
• Communication Services: -3.68%
• Industrials: -2.06%
• Materials: -2.01%
• Financials: -2.00%
• Technology: -1.82%

This shift suggests a preference for sectors perceived as more stable during periods of volatility, while investors moved away from growth-oriented and cyclical sectors.

Drivers of Market Sentiment

Several factors contributed to the market's bearish tone this week:

1. Political and Policy Uncertainty Concerns around Washington, particularly regarding budget negotiations and potential tariffs under a possible Trump 2.0 scenario, weighed heavily on sentiment. Progress on the budget was limited, with Trump endorsing the House budget while the Senate worked on a separate bill. GOP lawmakers warned that negotiations are not going well ahead of the March 14 government shutdown deadline. Tariff-related headlines added to the volatility, with Trump indicating potential 25% tariffs on autos, semiconductors, and pharmaceuticals as early as April. While tariff revenues have been floated as a replacement for taxes, raising concerns of a harsher tariff regime, there were also signs of potential softening, including Trump's comments on a possible new China trade deal and the EU's willingness to discuss tariff reductions to avoid a trade war.
2. Economic Data and Growth Worries Weaker-than-expected economic indicators fueled concerns about the broader economic outlook. Key data releases included disappointing housing metrics and mixed PMI results, which highlighted uncertainty over federal government policies and broader growth prospects.
3. Inflation Concerns Inflation expectations remained elevated, adding to market unease. The Michigan Consumer Sentiment report revealed a decline in sentiment, with 1-year inflation expectations at 4.3% (the highest since November 2023) and 5-year inflation expectations rising to 3.5% (the highest since 1995).
4. Positioning and Sentiment Extended sentiment and positioning, highlighted by a selloff in momentum and retail favorites (including meme stocks), suggested a potential unwind of speculative positions. Goldman Sachs estimated that Commodity Trading Advisors (CTAs) could sell $61 billion of US stocks in the next month if markets decline further, compared to just $10 billion of purchases in an upside scenario.

On the bullish side, there were some supportive factors:

• Treasury yields eased slightly, bolstered by the Federal Reserve's signaling on slowing or pausing quantitative tightening (QT) mid-year and Treasury Secretary Bessent's comments on delaying boosts to longer-term debt sales.
• The Citi Economic Surprise Index turned negative, which some analysts suggested could pave the way for a more dovish Fed policy stance.
• Despite some weaker retail sales data (e.g., Walmart, restaurant commentary), Goldman Sachs economists noted a healthy macro backdrop for consumers, attributing some softness to weather-related factors rather than fundamental weakness.

Economic Data:

This week's economic releases painted a mixed picture:

• Manufacturing and Services PMIsThe flash Manufacturing PMI exceeded expectations, reflecting resilience in manufacturing activity.However, the flash Services PMI disappointed, falling into contraction for the first time in over two years, with the report flagging uncertainty over federal government policies.
• Consumer SentimentThe final Michigan Consumer Sentiment index fell, with inflation expectations remaining elevated. 1-year inflation expectations held at 4.3%, while 5-year expectations ticked up to 3.5%.
• Labor MarketInitial jobless claims for the week ending February 15 were slightly higher than expected, with some analysts noting rising claims in the DC area following recent federal government layoffs.
• Regional Manufacturing IndicesThe February Philly Fed Index fell over 26 points month-over-month to 18.1, missing the consensus estimate of 20.0, with prices paid and prices received reaching their highest levels since Q4 2022.The February Empire State Manufacturing Index posted a surprise positive print, though price indices also rose.
• Housing DataFebruary NAHB builder confidence missed expectations, falling to a five-month low of 42.January existing home sales also missed, reflecting concerns around interest rates, home prices, and softening demand.

Federal Reserve: Patience and Data Dependence

The Federal Reserve's January FOMC meeting minutes were largely in line with expectations, noting that many officials anticipate the balance sheet runoff (quantitative tightening) to conclude by mid-2025. Fed officials continued to emphasize patience and data dependence in their communications, with some expressing uncertainty about the inflationary impact of potential policy changes under a new administration.

Market pricing for rate cuts remained subdued:

• The odds of a March rate cut held steady at around 2%.
• The first-rate cut is currently priced in for July.
• The market is pricing in only 40 basis points of cuts for 2025, with little change week-over-week.

Corporate Updates: Earnings and Developments

Earnings season provided some notable insights:

• Walmart (WMT)Posted slightly better-than-expected comps, revenue, and EPS, but FY26 revenue growth and EPS guidance disappointed.Analysts noted that expectations were high heading into the report and suggested the guidance may be conservative. However, concerns were raised about government and consumer spending uncertainty, as well as margin headwinds from the Vizio acquisition.
• Other Earnings: Toll Brothers (TOL) missed expectations, and guidance disappointed.Booking Holdings (BKNG) beat a high bar, benefiting from a favorable demand backdrop.Alibaba and Baidu posted strong AI-related results and outlooks, reflecting positive momentum in Chinese tech.

Outside of earnings, there were significant developments:

• Semiconductors Taiwan Semiconductor (TSM) and Broadcom (AVGO) are considering potential deals that could split Intel into two entities. Semiconductors were a relative outperformer, with some optimism around the AI secular growth narrative (e.g., Alibaba +15.3%, Analog Devices +11.3%) and Trump's tariff threats and breakup comments benefiting stocks like Texas Instruments (+10.3%) and Intel (+5.3%).
• Healthcare UnitedHealth Group (UNH) faces a Department of Justice probe over billing practices that allegedly resulted in extra payments to Medicare Advantage plans.
• Consumer Nike announced the launch of the new Nike SKIMS brand.

Looking Ahead: Key Data and Events

Next week's data releases will be crucial for shaping market expectations:

• Tuesday, February 25February Richmond Manufacturing Index (8:30 ET)Consumer Confidence (8:30 ET)
• Wednesday, February 26New home sales (10:00 ET)
• Thursday, February 27January durable goods (8:30 ET) Initial jobless claims (8:30 ET) January pending home sales (10:00 ET)
• Friday, February 28January Core PCE, a critical inflation indicator expected to rise from 0.16% in December to 0.3% month-over-month, with the annualized core PCE expected to jump 0.7 percentage points to 1.7% year-over-year.

Treasury auctions next week include:

• Monday: $72 billion in 2-year notes
• Tuesday: $74 billion in 5-year notes
• Wednesday: $46 billion in 7-year notes

Market Observations

1. Sector Trends A noticeable shift towards defensive sectors such as Utilities, Healthcare, and Consumer Staples has occurred, reflecting a preference for areas often seen as more stable during volatile periods. Meanwhile, tech and cyclical sectors have lagged, though certain segments, like semiconductors, continue to show resilience, buoyed by optimism around AI developments.
2. Tech and Cyclical Dynamics Despite recent underperformance, the semiconductor industry stands out with potential strength, driven by AI-related growth and discussions of consolidation involving companies like TSM, AVGO, and INTC. Broader technology performance has been uneven, with significant declines in large-cap stocks such as META, AMZN, and TSLA contributing to the sector's challenges.
3. Inflation and Interest Rate Context Rising inflation expectations and the Federal Reserve's measured approach remain key factors shaping the current environment, drawing attention to areas potentially less affected by rate shifts, such as Energy and Real Estate.
4. Geopolitical and Policy Considerations Ongoing developments in Washington and global trade discussions, including potential tariffs on autos, semiconductors, and pharmaceuticals, continue to influence market sentiment and sector dynamics.
5. Corporate Performance Insights Companies with robust financials and adaptable operations are navigating uncertainties effectively, while positive updates in Chinese tech, such as from Alibaba and Baidu, underscore ongoing momentum in AI-related areas.

While the market faces headwinds from political uncertainty, economic data, and inflation concerns, there are pockets of opportunity for discerning investors. A balanced approach may help navigate the current volatility. As we look ahead to next week's data releases, particularly the Core PCE inflation report, staying informed and agile will be critical for success in this dynamic environment.

Have a great weekend!

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