Posted: 2-7-25 | Innovia Wealth
Market Dynamics
Highlights:
- Stocks and bonds experienced volatility in January but finished the month in positive territory.
- February is expected to be dominated by earnings reports and policy announcements.
| Asset Class | 1 month returns | 3-year returns (annualized) | 5-year returns (annualized) |
| Large companies (S&P 500) | 2.8% | 11.9% | 15.2% |
| Large technology businesses (Nasdaq 100) | 2.3% | 13.8% | 20.0% |
| Small companies (Russell 2000) | 2.6% | 5.6 % | 8.7% |
| Foreign stocks (ACWI ex US) | 4.1% | 4.0% | 6.0% |
| Bonds (Bloomberg US Aggregate) | 0.5% | -1.5% | -0.6% |
January: a volatile start to the year for stocks, bonds and news
January began with strong momentum for stocks, continuing the positive trend from 2024. In contrast, bonds started weakly as future concerns around inflation increased, weighing on investor sentiment. By mid-month, equities and bonds turned negative as investors grew more worried about the possibility of tariffs and their potential impact on inflation and market valuations. However, market sentiment shifted positively towards the end of the month following news of a decrease in core inflation along with indications that the new administration might take a less aggressive approach on tariffs.
Inflation currently sits below 3%, though it remains above the Federal Reserve’s 2% target. Analysts expect inflation to gradually decrease throughout 2025, and both stocks and bonds have responded favorably to that outlook.
Corporate earnings reports have been strong, with Q4 earnings showing a 12.5% increase and 80% of companies exceeding analysts’ expectations. This has helped support stock prices through the end of the month.
In the last week of January, technology stocks were jolted by reports that new artificial intelligence innovations from China are outperforming U.S. competitors, exhibiting a lower cost base and with less reliance on high end chips from NVIDIA. While it is too early to assess the accuracy of these claims or their long-term impact to U.S. technology companies, it underscores the importance of diversification, especially when the market becomes highly concentrated.
Inflation is down from the peak, but not below 2% and has rebounded since October.
February: earnings and policy announcements in focus
Late January brings a focus on earnings announcements from the prior year, along with projections for 2025 and beyond. As mentioned earlier, Q4 earnings have been strong, and expectations for 2025 are optimistic with operating earnings projected to grow by 18% (see chart below). If these expectations are met, equity markets should remain strong. However, it is important to remember that over the last 75 years, average earnings per share growth have been 6% per year annually, so sustaining growth at three times this rate could prove challenging.
In addition to earnings, policy announcements will play a significant role in shaping markets. Major cuts to government spending have already been announced, and there have been a slew of executive orders aimed at reducing government employment, cutting programs, and shifting U.S. foreign policy. So far, the market has remained largely unaffected by these developments, but this could change quickly if major tariffs or policy shifts are perceived negatively for the broader market or economy. In such an environment, adaptability achieved through diversification will likely be key to managing risk.
Strong earnings growth is expected for the S&P 500 in 2025.
Looking forward to 2025
We remain optimistic about equity markets supported by strong earnings and a robust economy. This is also an ideal time to review portfolio allocations to rebalance towards strategic weightings. Over the long term (5+ years), we believe better returns will come from undervalued stocks, small-cap businesses, and international exposures.
In fixed income, we favor extending portfolio duration when higher long-term interest rates present themselves. We also prefer mortgage-backed securities and mid-quality corporate bonds, which offer attractive spreads with relatively low default risk.
In private investments, we continue to focus on our Vintage and Opportunity Funds, while also reviewing and updating our semi-liquid exposures to credit, real estate, infrastructure, and equity.
We look forward to meeting with you to discuss the current market situation, help position your portfolio for optimal results and explore exciting private market opportunities.
Private Markets Pulse
We are excited to announce that the Innovia Vintage 2025 Fund made its first commitment to GEM Independent Sponsor Fund I. GEM (formerly known as Global Endowment Management) is a Charlotte, NC based manager that advises mid-sized institutions on their overall allocations. As part of that work, they have developed expertise in identifying investors spinning out of larger private investment firms to start their own private investing businesses. GEM backs these entrepreneurs as they work to acquire their own businesses with preferred terms and access to future investment activity. GEM underwrites each made investment to around a 4x return or better. We agree with GEM that these investments are being made at the highest point of alignment between the investor and their L.P.s. We also expect these relationships will provide many opportunities for great investments in companies and funds in the future as we continue to grow the Innovia Vintage Series.