Worries Over Economic Growth Weigh on Stocks

Performance for Week Ending 2.21.2025:

Stocks retreated during the week on economic concerns. The Dow Jones Industrial Average (Dow) fell 2.5 percent, the Standard & Poor’s 500 Index (S&P 500) lost 1.7 percent and the Nasdaq Composite Index (NASDAQ) finished down 2.5 percent. Sector breadth was mixed with 6 of the S&P sector groups closing lower and 5 closing higher. The Utilities sector (+1.4 percent) was the best performer while the Consumer Discretionary (-4.3 percent) was the weakest.

*See below for Index Definitions

MARKET OBSERVATIONS: 2.17.2025  – 2.21.2025

After closing at a new all-time on Wednesday, the S&P 500 finished the holiday shortened week modestly lower. The late week drawdown reflected mixed economic reports, an earnings warning from Walmart, and uncertainty surrounding tariffs. Walmart, the world's largest retailer and one of the country’s biggest employers, forecast sales and profit for the fiscal year ending January 2026 below analysts' estimates, as it anticipates inflation-weary consumers to pull back after several quarters of solid growth. Walmart is viewed as a bellwether for the retail industry and an indicator for consumer spending, which is the main driver of the US economy. Walmart’s warning followed the recently reported January retail sales data that showed sales falling by 0.9 percent month-over-month, the largest drop in nearly two years.

Q4 Earnings: With 429 members of the S&P 500 reporting earnings, 76 percent beat expectations. Earnings are up 10.8 percent from a year ago, behind current expectations of 12.8 percent but solidly ahead of the 7.5 percent estimate on December 31st. Consumer discretionary and communication services companies have posted the strongest growth, while energy and industrials have posted the weakest. Full-year earnings estimates have been trending lower, although earnings are still forecast to grow by a solid 10 percent pace.

Fed Speak – No Hurry to Cut: Fed Governor Christopher Waller said recent economic data support keeping interest rates on hold, but if inflation behaves as it did in 2024, policymaker cuts could resume “at some point this year.” “If this wintertime lull in progress is temporary, as it was last year, then further policy easing will be appropriate,” Waller added. San Francisco Fed President Mary Daly emphasized policy needs to remain restrictive until inflation shows more progress, which she expects will gradually ease. Daly added that Fed officials should take their time in assessing the net impact of a raft of new policies being pursued by the Trump administration before adjusting monetary policy. Atlanta Fed President Raphael Bostic said officials should be patient when evaluating how President Donald Trump’s policies may affect the economy, noting some approaches could add to inflation while others could spark investment. “I’ve been really comfortable with the idea that we would take a pause and wait and see how the economy’s evolving and then use that information to guide what our policy should look like over the next several months,” Bostic said.

Economic Roundup: On the Labor front, applications for U.S. unemployment benefit applications were little changed last week, hovering around pre-COVID levels that indicate solid demand for workers. Initial claims increased by 5,000 to 219,000 in the week ended Feb. 15, with the four-week moving average little changed at 215,250. In housing, existing home sales fell by 4.9 percent during January, but increased 2.0 percent on a year-over-year basis, marking the fourth consecutive month of positive gains after 38 months of declines. Meanwhile, housing starts slowed in January as builders hesitated on single- and multi-family homes amid growing worries over mortgage rates and unsold homes. Lastly, U.S. business activity expanded this month at the slowest pace since September 2023, dragged down by the service sector. The S&P Global preliminary February composite index for services and manufacturers decreased to 50.4, the lowest level in 17 months, as uncertainty around the Trump administration’s policies weighed on orders and business expectations. Figures above 50 indicate expansion.

Market Viewpoint: The market is off to a solid start; however we continue to believe there is still money to be made over the course of this year. While headline uncertainty could lead to some near-term volatility, 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 14.0 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: The focal point of the data calendar will be Friday’s release of the core PCE inflation data, the Fed’s preferred measure of inflation. Other reports of interest will be the Conference Board's consumer confidence on Tuesday and durable goods on Thursday. In corporate earnings, with more than 400 S&P 500 members already reported, the spotlight will be on Wednesday’s results from Nvidia, the world's second largest stock by market cap and the AI bellwether. Other blue-chip names to watch include Salesforce and Home Depot. It will be a busy week for Fed speak with a dozen speeches on the docket.

— 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.