Market Update – February 10th, 2025

Financial Markets

Stocks declined last week as weaker-than-expected job growth and a sharp drop in consumer sentiment, driven by tariff-related inflation concerns, outweighed the slight decline in the unemployment rate. As of Friday, February 7th, the S&P 500 fell -0.24%, the Nasdaq Composite declined -0.53%, and the Dow Jones Industrial Average dropped -0.54%, while the Barclays Aggregate Bond Index edged up 0.06%.

Source: Zacks

Market News

January Employment

January’s employment report showed a decline in the unemployment rate to 4%, though job growth fell short of expectations. Nonfarm payrolls rose by 143,000, missing the expected 170,000. Job gains were concentrated in healthcare (+44,000), retail trade (+34,000), government (+32,000), and social assistance (+22,000), while most other industries, including construction, transportation, hospitality, and business services, saw little change.

Wage growth, however, surprised to the upside, rising 0.5% for the month and 4.1% year-over-year, signaling continued real wage gains above inflation. The labor market remained stable in January as the decline in unemployment and stronger wage growth offset hiring slowdown concerns, further complicating the case for near-term rate cuts.

Source: Bureau of Labor Statistics

Consumer Sentiment

The University of Michigan’s Consumer Sentiment Index showed a decline in February, driven by renewed inflation concerns linked to tariffs. Sentiment fell -4.6% from January and -11.8% year-over-year, marking its lowest reading since July 2024. The decline was broad-based, with Republicans, Democrats, and Independents all reporting lower sentiment, alongside consumers across diverse age and wealth demographics.

On February 1st, the White House announced a 25% tariff on Canadian and Mexican imports, with a lower 10% tariff on Canadian energy, as well as a 10% tariff on imports from China. While the tariffs on Canada and Mexico appear to be delayed as negotiations continue with the U.S., the 10% tariff on Chinese imports took effect last week, impacting a wide range of materials and finished goods. Consumers expressed concerns over inflationary pressures stemming from these tariffs, as year-ahead inflation expectations jumped from 3.3% last month to 4.3% in February.

ISM Manufacturing

The ISM Manufacturing Index surpassed the 50% mark for the first time in over two years, signaling expansion after 26 consecutive months of contraction, with January’s PMI rising to 50.9%. Within the index, employment and production turned positive in January, in addition to improvements in the already strong new orders index. However, the downside to this stronger report is that prices appear to be rising at a faster pace. The next few months will be crucial in determining whether this was an outlier or the beginning of a sustained recovery in the manufacturing sector.

Source: Institute for Supply Management

ISM Services

The services sector continued its expansion in January, marking the seventh consecutive month of growth, according to the ISM Services PMI. The index posted at 52.8%, indicating expansion for the 53rd time in the past 56 months. While new orders and activity cooled slightly, they remained well into positive territory. The prices index eased month over month but stayed elevated at 60.4%, well above the 50% neutral level. Overall, this month’s ISM report highlights continued strength in the services side of the economy.

Source: Institute for Supply Management

Q4 Earnings

Despite some choppiness at the individual company level, fourth-quarter earnings for the S&P 500 are shaping up well, with over half of the index having reported. Year-over-year EPS growth for companies that have reported, along with estimates for the remaining firms, is expected to reach 16.4% across the S&P 500, supported by revenue growth of 5.2%. Both earnings and sales are exceeding expectations heading into 2025, where initial estimates had projected 11.8% earnings growth and 4.6% sales growth.

Financials continue to lead the way with annual earnings growth of 51.2% year-over-year. Given that banks and financial firms are often considered a barometer for the broader economy, their strong performance is an encouraging sign of economic stability. Other sectors, including communication services and consumer discretionary, are also outpacing the S&P 500 in earnings growth.

Source: FactSet, as of 2/7/25

Summary

Stocks fell last week as weaker-than-expected job growth and a sharp drop in consumer sentiment, driven by tariff-related inflation concerns, overshadowed a slight decline in the unemployment rate. Wage growth exceeded expectations, rising 0.5% for the month and 4.1% year-over-year, complicating the case for near-term rate cuts. The ISM Manufacturing Index moved into expansion for the first time in over two years, while the ISM Services Index continued growing despite elevated prices. Finally, Q4 earnings have been strong, with S&P 500 earnings projected to grow 16.4% year-over-year, led by financials, communication services, and consumer discretionary sectors.

We appreciate your continued trust.

Thank you,

Joseph M. Maas,
CFA, CFP®, ChFC, CLU®, MSFS, CCIM, CVA, ABAR, CM&AA

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