CWS Market Review – January 21, 2025

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Last year, the stock market averaged one new high a week, but over the last six weeks, there have been zero new highs. Not a single one. For the first time in a while, the stock market appears apprehensive. The market isn’t good or bad, but it’s choppy. It seems like the index can’t muster enough momentum to go in either direction for very long.

Of course, by historical standards, this is perfectly normal. This is what markets do: they bounce around. The unusual period is the one we recently left. Consider that from October 2022 until last month, the S&P 500 Total Return Index gained 75%. That’s not bad for a little over two years’ work.

Just understand that from an investor’s perspective, that was the odd period, not what we’re seeing now. As of Tuesday’s close, the S&P 500 was about 0.75% away from a new all-time high close. It may come tomorrow. As we know, the market gods have a habit of doing the unexpected.

There are a number of signs that suggest that the U.S. economy is healthier than many think. It’s odd how not that long ago, it was assumed that the economy was about to fall on its face. I continue to be amazed by the very poor relative performance of the defensive sectors. Consumer staples and health care stocks, in particular, have badly lagged the market. That’s not what you’d expect to see in a recession or even a late-cycle market.

When you see stalwart blue chips Colgate-Palmolive (CL) and Johnson & Johnson (JNJ) lag the market, I’m inclined to think it says something about the market’s appetite for risk and not much about Colgate and J&J themselves.

While the Mag 7 gets a lot of attention, the tech sector as a whole hasn’t done that well, in a relative sense, over the past year. Instead, we’ve seen impressive relative strength in areas like industrial stocks. Materials are also doing well. These are classic cyclical areas of the market. No one, it seems, wants to hold the steady stalwarts.

On our Buy List, stocks like Miller (MLR) and Mueller (MLI) are both up more than 4% this year. Allison Transmission (ALSN) is already an 11% winner for us this year.

How about IES Industries (IESC)? The company has a market value of $5 billion, 9,000 employees, and it’s not followed by any analysts on Wall Street. It’s up 37% this year!

We’ll soon learn a lot more about these companies when they report earnings. Now let’s look at some details from earning season.

It’s Early but Q4 Earnings Are Looking Good

The Q4 earnings season is starting to heat up. We’ve already had our first few reports, and that will soon turn into a flood.

I should explain that Q4 earnings season is slightly different than the earnings seasons of the other quarters. Companies are allowed a little more time to report their full-year results. That means that Q4 earnings season is longer, and it stretches well into February.

After the closing bell today, we got a very good earnings report from Netflix (NFLX). The stock is up $115 per share, or 13% in after-hours trading.

For this earnings season, we have some early numbers. According to FactSet, 9% of the S&P 500 has reported so far. Of that, 79% have beaten their earnings reports and 67% have beaten sales. That’s quite good.

So far, earnings growth is tracking at 12.5%. Again, that’s early, but if that number holds, it will be the strongest growth we’ve seen since Q4 of 2021, which was severely impacted by Covid.

Only one stock so far has issued negative guidance, but four have issued positive guidance.

The forward P/E Ratio for the S&P 500 now stands at 21.6. That’s not extreme, but it’s higher than the market’s five and ten-year averages (19.7 and 18.2, respectively). Overall, there’s little reason for alarm, especially if earnings continue to grow as they have.

Watch Out for Value Traps

Shares of Walgreens Boots Alliance (WBA) got knocked down by 9% today. The Justice Department said it’s suing Walgreens claiming that the pharmacy chain unlawfully filled prescriptions for addictive painkillers.

The DOJ has already gone after CVS. The opioid epidemic has been a major problem for several years. According to the U.S. government, from 1999 to 2022, there were nearly 727,000 deaths from opioid overdosing.

The lawsuit alleged that by knowingly filling unlawful prescriptions for controlled substances, Walgreens violated the Controlled Substances Act. The government also alleged it violated the False Claims Act when it then sought reimbursement from federal health care programs, like Medicare, for the prescriptions.

The lawsuit was announced after Walgreens filed its own lawsuit on Thursday challenging what it said were new policies the U.S. Drug Enforcement Administration had unlawfully adopted, seeking to ensure pharmacies do not dispense controlled substances for medically illegitimate purposes.

CVS had to write a big check, and I suspect that Walgreens will have to do the same. Two weeks ago, WBA reported good earnings for its fiscal Q4. The company made 51 cents per share which topped expectations of 38 cents per share.

I’m highlighting WBA because it’s a good example of a “value trap.” By that, we mean a stock that has the outward appearance of being an inexpensive stock based on conventional valuation metrics. WBA certainly fits that. It’s going for seven times this year’s earnings, but it’s not a value stock. It’s wildly overvalued once you factor in its legal realities.

Over the last 10 years, the S&P 500 has more than tripled while Walgreens is down by 80%. This is an important lesson for investors. Whenever we see a stock that seems to be going for a low valuation, we need to ask why. There may be a very good reason why.

Don’t Count the Economy Out

We recently got a good jobs report. The government said that the economy created 256,000 net new jobs last month. That beat expectations of 155,000. The unemployment rate fell by 0.1% to 4.1%. The jobless rate has been below 4.3% for the last 38 months in a row.

Last week, the Bureau of Labor Statistics said that inflation increased by 0.4% last month. Despite the higher headline rate, core inflation, which excludes food and energy, increased by 0.2% last month. That was 0.1% below expectations. Over the past year, core inflation is running at 3.2%.

Not too long ago, Wall Street assumed that the Federal Reserve would be slashing interest rates this year. That may not be the case. The Fed meets again next week, and you can forget about any rate cuts coming. The futures market currently thinks there’s a 0.5% chance of an interest rate cut. I think that’s about 0.49% too high, but that’s only a guess.

For the meeting after that, coming in March, futures traders think there’s only a 26% chance that the Fed will cut interest rates. Traders don’t see a cut coming at the May meeting, either. They think the first cut will come in the middle of June.

Remarkably, that’s the only Fed interest rate cut that traders expect all year. This is a huge change in sentiment from just a few weeks ago. If earnings continue to grow as they are now, what’s the point of cutting rates?

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

Posted by on January 21st, 2025 at 6:45 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.