The Economy and Markets: A Mixed Bag
As we enter 2025, the economy and markets are sending mixed signals. On one hand, the US economy has shown resilience, with GDP growth sustaining mid-year strength into the third quarter. Consumer spending, business investment, and government spending have all contributed to this growth. On the other hand, the Fed’s recent rate cuts have signaled a potential pause in monetary policy, leading to a sell-off in the markets.
GDP Growth: A Strong Third Quarter
The third-quarter GDP report showed growth of 3.1%, up from 2.8% in the preliminary and advance reports. This growth was driven by higher consumer spending, exports, nonresidential fixed investment, and federal government spending. Personal consumption expenditures increased 3.7%, with spending on goods rising 5.6% and services growing 2.8%. Durable goods spending was particularly strong, rising 7.6%.
The Fed’s Rate Cuts: A Mixed Blessing
The Fed’s recent rate cuts have been seen as a mixed blessing. While they have provided relief to borrowers, they have also led to a sell-off in the markets, as investors worry about the potential for slower growth. The Fed’s statement suggesting that it may not cut rates further in 2025 has added to the uncertainty.
Earnings Growth: A Bright Spot
Despite the mixed signals from the economy and markets, earnings growth has been a bright spot. The strongest EPS growth in the third quarter came from Communication Services, with media giants Meta Platforms and Alphabet leading the way. Other sectors, such as Information Technology, Financials, and Healthcare, are also expected to sustain strong growth rates.
Market Outlook: Cautious Optimism
As we look ahead to 2025, our market outlook is one of cautious optimism. We believe that the economy can avoid recession, and that earnings growth will continue to drive the markets higher. However, we also recognize that the Fed’s rate cuts have introduced uncertainty, and that fiscal policy could have an outsized impact in 2025.
Sector Rotation: A Shift to Cyclical and Defensive Sectors
In the second half of 2024, we saw a rotation away from traditional growth areas, such as Information Technology and Communication Services, towards cyclical, rate-sensitive, and defensive sectors. This rotation is likely to continue in 2025, as investors seek out areas that are less dependent on monetary policy.
Conclusion
In conclusion, the economy and markets are sending mixed signals as we enter 2025. While GDP growth has been strong, the Fed’s rate cuts have introduced uncertainty. Earnings growth, however, remains a bright spot, and we believe that the economy can avoid recession. Our market outlook is one of cautious optimism, with a focus on cyclical, rate-sensitive, and defensive sectors.
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