Uncertainty Denting Investor Sentiment

Performance for Week Ending 2.28.2025:

The Dow Jones Industrial Average (Dow) gained 1.0 percent, the Standard & Poor’s 500 Index (S&P 500) lost 1.0 percent and the Nasdaq Composite Index (NASDAQ) finished down 3.4 percent. Sector breadth was mixed with 7 of the S&P sector groups closing higher and 4 closing lower. The Financials sector (+2.8 percent) was the best performer while Technology (-4.0 percent) was the weakest.

*See below for Index Definitions

MARKET OBSERVATIONS: 2.24.2025  – 2.28.2025

The S&P 500 finished lower for a second straight week reflecting building worries about softening economic growth, an underwhelming earnings report from AI bellwether Nvidia, geopolitical tensions, and concerns over the impact tariffs will have on growth and inflation. The uncertainties have also weighed on investor sentiment. Last week the American Association of Individual Investors (AAII) reported that its Bearish Sentiment Index surged above the 60% threshold for only the sixth time since 1987. For the month of February, the S&P 500 fell 1.4 percent, its biggest one-month drop since December.

Q4 Earnings: Through Friday, 485 members of the S&P 500 have released fiscal quarter results with just over 74 percent beating expectations. Aggregate earnings for this group are up 13.4 percent from a year ago, trailing slightly behind the current 14.1 percent projected growth rate for the overall quarter but solidly ahead of the 7.5 percent estimated growth rate on December 31st. On the sector level, communication services and consumer discretionary companies have posted the strongest growth, while energy and industrials have posted the weakest. Full year earnings estimates have been trending lower in recent weeks, although earnings are still forecast to grow by a solid 10 percent pace.

Fed Speak: Despite the economy showing signs of weakness, Fed officials seemed to be in no hurry to reduce rates. Kansas City Fed President Jeff Schmid sounded a warning about rising inflation expectations and concerns over economic growth, cautioning that the U.S. central bank may soon confront both. Cleveland Fed President Beth Hammack said interest rates are not “meaningfully restrictive” and should be held steady for some time as officials wait for evidence inflation is returning to their 2 percent target. Philadelphia Fed President Patrick Harker said officials should allow their policy stance to continue to lower inflation, signaling support for holding interest rates steady for now. Atlanta Fed President Raphael Bostic said the U.S. central bank should hold interest rates where they are, at a level that continues to put downward pressure on inflation. Richmond Fed President Tom Barkin said the central bank must remain determined in its inflation fight and flagged the risk of longer-term inflationary headwinds.

Economic Roundup: Despite the recent market turbulence, our favorable outlook on the equity market is unchanged and we continue to believe there is still money to be made over the course of this year. While headline uncertainty could lead to some additional downside risk, over the intermediate- to longer-term, fundamentals—the economy, earnings, and interest rates—are what drive stock prices. The good news is that the macro environment is expected to remain supportive in the coming quarters. The U.S. economy remains on firm footing, with minimal risk of a near-term recession. The Fed is easing and, while the path forward could prove uneven, rates are likely to drift lower over the next year. Importantly, the earnings growth outlook remains strong. Consensus expectations from Bloomberg for S&P 500 earnings growth are 10.0 percent and 14.1 percent in 2025 and 2026, respectively. The combination of an accommodative Fed and brisk earnings growth creates a favorable backdrop for risk assets and should continue to drive the bull market. Still, with valuations elevated, earnings growth will likely drive performance, meaning that gains over the course of the year may be more modest compared to the past two years.

Market Viewpoint: Despite the recent market turbulence, our favorable outlook on the equity market is unchanged and we continue to believe there is still money to be made over the course of this year. While headline uncertainty could lead to some additional downside risk, over the intermediate- to longer-term, fundamentals—the economy, earnings, and interest rates—are what drive stock prices. The good news is that the macro environment is expected to remain supportive in the coming quarters. The U.S. economy remains on firm footing, with minimal risk of a near-term recession. The Fed is easing and, while the path forward could prove uneven, rates are likely to drift lower over the next year. Importantly, the earnings growth outlook remains strong. Consensus expectations from Bloomberg for S&P 500 earnings growth are 10.0 percent and 14.1 percent in 2025 and 2026, respectively. The combination of an accommodative Fed and brisk earnings growth creates a favorable backdrop for risk assets and should continue to drive the bull market. Still, with valuations elevated, earnings growth will likely drive performance, meaning that gains over the course of the year may be more modest compared to the past two years.

The Week Ahead: U.S. politics will be the key topic next week as President Trump addresses a joint session of Congress outlining his agenda on Tuesday, his first such speech since his inauguration last month. In addition, the proposed tariffs of 25 percent on Mexico and Canada as well as another 10 percent on China are set to take effect next Tuesday as well. On the economic front, the focal point will be the U.S. payroll report on Friday as concerns about economic growth pick up among investors. According to Bloomberg, nonfarm payrolls are expected to gain 158,000 in February, up from 143,000 in January. The unemployment rate is forecast at 4.0 percent, unchanged from last month. Apart from the jobs report, other releases providing a read on economic growth include the Institute for Supply Management (ISM) indices and the Fed's Beige Book report on Wednesday. Fourth quarter earnings season will continue to wind down with just 12 members of the S&P 500 expected to report. Retailers will be in the spotlight with results due out from AutoZone, Target, Best Buy, Ross Stores, Kroger, and Costco. It will be a busy week for Fed speak with ten speeches on the docket including Fed Governor Chris Waller on Thursday and Fed Chair Powell on Friday. Both Fed heads are expected to give their updated views on the state of the economy.

— By Michael Schwager, Chief Market Strategist, Managing Director

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market Index^SM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500^© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.