CWS Market Review – January 7, 2025

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The stock market has started off the new year a bit more cautious than it was last year. The S&P 500 fell for five days in a row before it rallied last Friday. The index has now gone one month without making a new high. Of course, this is fairly normal market behavior, but it’s markedly different from what we experienced last year. In 2024, the S&P 500 made 57 record highs.

During December, growth stocks strongly outpaced value stocks. This was probably in anticipation of the Federal Reserve dialing back its plans to lower interest rates. During the final trading week of the year, value stocks started to improve somewhat in relative terms, but that came to a halt with the new year. Growth stocks have again been leading value.

Earnings Season Starts Next Week

The next big test for the market will be Q4 earnings season which is set to begin soon. Next Wednesday, January 15, is the unofficial start to earnings season. That’s when several of the major banks, like JPMorgan Chase (JPM) and Wells Fargo (WFC) are due to report.

Note that companies tend to report their Q4 earnings a bit later than their other quarters. I suppose it takes a little more time to compute their full-year results.

Wall Street currently expects the S&P 500 to report Q4 earnings growth of 8.81%. That’s down some from last month when expectations were for 9.02% growth. Within the index, the increases have been among consumer staples and consumer discretionaries. The lower estimates have been among industrials.

At the end of the month, the government will release its first estimates for Q4 GDP growth. The Atlanta Fed’s GDP Now model currently expects growth of 2.4% for Q4 (that’s annualized and adjusted for inflation). That sounds about right. What’s interesting is that it wasn’t too long ago that many folks on Wall Street assumed that we’d be mired in a recession by 2024, but it looks like we avoided one.

There’s more data to come this week. Tomorrow we’ll get the ADP payroll report and Wall Street doesn’t expect much. The consensus is for a gain of 136,000 private sector jobs.

The stock market will be closed on Thursday in honor of President Carter’s funeral. On Friday, we’ll get the official January jobs report from the Labor Department. The consensus is for a gain of 155,000 nonfarm payrolls. I think the market is being modest with its expectations. Economists also expect the unemployment rate to stay at 4.2%. Historically speaking, that’s still quite low.

I’m particularly concerned with wages. The consensus expects average hourly earnings to have increased by 0.3% last month and for a 12-month gain of 4%. Frankly, that needs to improve. Wages are rising faster than inflation, but not by much. Wage gains are future revenue for businesses.

Next week, on January 15, we’ll also get the CPI report for December. This could be an important announcement. While the Fed has been largely successful in battling inflation, it hasn’t won the war just yet. Inflation is proving to be very stubborn. In fact, inflation has accelerated very slightly over the last few months. In other words, not only are prices rising but the pace of those increases has been rising.

Where does this leave the Federal Reserve? Well, that’s a good question. The Fed meets again in three weeks, and it’s looking like the Fed is going to pause on its rate hikes. I can’t blame them. Housing inflation is especially concerning.

According to traders, the Fed will pause next week, and there’s a better than even chance that it also pauses at the following two meetings, in March and May. That means the Fed may not cut rates again until the middle of the year. This is a major change from a few weeks ago, and it’s why I think growth stocks have been doing so well.

Today, President-elect Donald Trump announced a $20 billion foreign investment to build new data centers in the United States. The money will be put up by Hussain Sajwani, the founder of DAMAC Properties. Trump added that Sajwani could double that figure or go even higher.

From CNBC:

The “first phase” of the plan will take place in Texas, Arizona, Oklahoma, Louisiana, Ohio, Illinois, Michigan and Indiana, Trump said.

Sajwani suggested that the Republican’s election spurred him to commit to the investment.

“It’s been amazing news for me and my family when [Trump] was elected in November. We’ve been waiting four years to increase our investment in [the] U.S. to very large amounts of money,” the Dubai developer said in brief remarks at Mar-a-Lago.

Sajwani’s pledge is the latest example of a foreign business leader promising to spend big in the U.S. as a result of Trump’s victory over Democratic Vice President Kamala Harris.

Last month, Softbank CEO Masayoshi Son announced plans to invest $100 billion in America and create 100,000 jobs over the course of Trump’s four-year term.

Speaking of data centers, I can’t help noticing that IES Industries (IESC), one of our new stocks on the Buy List, got off to a strong start this year. At one point earlier today, IESC was up more than 23% on the year.

The company “designs and installs integrated electrical and technology systems and provides infrastructure products and services to a variety of end markets, including data centers, residential housing, and commercial and industrial facilities.”

We shouldn’t celebrate too soon. IESC closed lower today even though it was higher this morning. That’s the thing about investing in growth stocks: the good times are great, and the bad times are terrible.

Stepan Hits a New 52-Week Low

Recently shares of Stepan (SCL) reached a new 52-week low. With most stocks, that’s disconcerting news, but with a company like Stepan, it grabs my interest. Bear in mind that Stepan has increased its dividend every year for the last 57 years.

Stepan is a special chemical market. I know, super boring, but they make stuff that people need. Stepan makes basic and intermediate chemicals, including surfactants, specialty products, phthalic anhydride and polyurethane polyols.

Surfactants are used in cleaning agents and consumer products like detergents, toothpaste, and cosmetics.

Stepan’s surfactants also have commercial and industrial applications ranging from emulsifiers for agricultural insecticides to agents used in oil recovery. The company also makes phthalic anhydride and other polymers for food and pharmaceutical uses.

Stepan had a strong Q3 earnings report. For the quarter, Stepan made $1.03 per share which was far ahead of Wall Street’s estimate for 65 cents per share.

President and CEO Luis E. Rojo said, “Team Stepan delivered a solid quarter despite significant challenges. Third quarter adjusted EBITDA grew double digits driven by the Surfactant and Specialty Product businesses. Surfactants continued its volume recovery and experienced double-digit volume growth within the Agricultural, Oilfield and the Construction and Industrial Solutions end markets and also with our Distribution partners.”

For this year, Wall Street expects Stepan to make $4 per share. That’s based on only three analysts. Even if that is correct, it means that Stepan is going for less than 16 times this year’s earnings.

In October, Stepan raised its quarterly dividend by one penny to 38.5 cents per share. That was its 57th annual dividend increase in a row. The dividend currently yields 2.4%. I wouldn’t say that Stepan is a fast-grower, but it’s a conservative stock with a long-term track record.

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

– Eddy

Posted by on January 7th, 2025 at 6:17 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.