Weekly Investment Update (01/24/2025)

Equity markets rallied in the short week as the S&P 500 hit all-time highs, closing above 6,100 on Thursday and reversing December’s pullback. Positive market breadth was driven by multiple catalysts, including a strong start to fourth-quarter earnings season and optimism surrounding President Trump’s initial policy priorities, such as the Stargate Artificial Intelligence initiative. While the president’s agenda has been well received by markets thus far, the full scope of policies will take time to unfold (more below) and is likely to pose ongoing uncertainty for markets.

While the fourth-quarter earnings season for the S&P 500 remains in the early stages, companies are generally beating analyst expectations. Thus far, both the percentage of S&P 500 companies reporting positive earnings surprises and the magnitude of those surprises are above recent averages. While the Magnificent 7 group of stocks drove earnings growth in 2024, earnings are beginning to broaden, a trend we expect to continue in 2025 and discuss further below.

On a quiet economic data week, initial unemployment claims moderately increased, in part due to the devastating wildfires in Los Angeles. While natural disasters may cause more noise in near-term employment data, they are unlikely to cause significant deterioration in long-term data, in our view. As the Federal Reserve is expected to leave interest rates unchanged at its Federal Open Market Committee meeting next week, it is likely to look through any temporary disruptions when making policy decisions.

Despite Historically Elevated Index Valuations, Select Opportunities Remain

What is happening: While the so-called Magnificent 7 group of companies are projected to deliver a 21.7% surge in earnings this reporting season, the broader market is beginning to show signs of increased strength. Excluding the seven mega-cap technology companies, the remaining constituents of the S&P 500 are expected to see a fourth-quarter earnings growth rate of 9.7%, the highest since the second quarter of 2022. Notably, earnings growth for the S&P 500 excluding the Magnificent 7 is expected to accelerate throughout 2025.

Valuation metrics show a divergence between the market-capitalization-weighted S&P 500 and its equally weighted counterpart, with the market-cap-weighted price-to-earnings ratio of 22.3x well above its 20-year average of 16.1x. In contrast, the equal-weighted S&P 500 price-to-earnings ratio of 17.7x is much closer to its 20-year average of 16.2x.

Why it matters: Despite a market environment that has been dominated by the Magnificent 7, other investment opportunities are still present. Bessemer portfolio managers have adjusted portfolio holdings to prepare for the current environment by trimming select positions where they view valuations as elevated and reinvesting the proceeds into high-quality companies with more attractive valuations.

For example, while the consumer discretionary sector in Europe lagged the overall index with a 23% decline in earnings, it is expected to see overall earnings growth of 13% this year as demand is set to improve. Given the fall in valuation for LVMH paired with the prospects for improving demand, Bessemer added to the position. Additionally, portfolio managers boosted their allocation to BJ’s Wholesale Club, seeing it as an attractive long-term investment, while trimming Costco at a higher valuation.

Additionally, teams increased their exposure to Corteva and Deere & Company due to attractive valuation and the prospects of an early recovery for agricultural industry fundamentals. We are mindful of capturing areas of the market that are seeing a revival in earnings growth and may be trading at lower valuations, increasing the margin of safety in our portfolios.

President Trump Signs Sweeping Set of Executive Orders Focused on Immigration, Energy, and Deregulation While Tariff Risk Appears Delayed

What is happening: During the first week of his second term, Donald Trump signed numerous executive orders addressing key areas such as immigration, energy, trade, healthcare, regulation, technology, and export controls. These actions highlight his administration’s priorities, including a strong focus on restricting immigration, increasing energy production, and deregulatory efforts.

Notably, Trump refrained from implementing specific tariff actions during his first days in office. Instead, he issued a memorandum titled “America First Trade Policy,” directing agencies to review U.S. trade policies and submit reports by April 1. Still, Trump indicated that a 10% tariff on China was under consideration and mentioned the possibility of imposing 25% tariffs on Canada and Mexico as early as February 1.

Why it matters: In the near term, market attention is likely to center on efforts to increase U.S. energy production, the impact of immigration restrictions on the labor market, and initial indications regarding tariff policy. The full implementation of Trump’s agenda is likely to unfold over time, with certain initiatives, particularly those related to trade, requiring extended periods for planning and execution. While Trump’s post-inauguration tariff rhetoric was less hawkish than many had anticipated, it remains a critical area to watch. Reports due on April 1 are expected to act as a catalyst for new tariff proposals or adjustments to existing ones. For example, we anticipate increased tariff rates on autos and imports from China, although ongoing issues, such as TikTok operations in the U.S., could delay a clear direction on China-specific policies.

From a market perspective, much of the favorable news on deregulation appears to have been front-loaded, while risks from tariffs have been delayed. We note that the U.S. 10-year Treasury yield has retraced earlier moves, dropping from 4.8% to 4.6%, partly due to better-than-expected inflation data as well as relief surrounding Trump’s initial trade actions. The Federal Reserve is likely to monitor immigration and trade policies closely, given their potential impact on employment and inflation. Still, it is important to note that tariffs tend to result in one-off price increases rather than becoming a sustained source of ongoing inflationary pressure. While potential trade policies remain a source of risk, they do not currently present an immediate obstacle for markets, in our view.