Weekly Investment Update (02/21/2025)

The stock market has been resilient, yet range bound, as investors continue to calculate (and recalculate) the net impact of earnings results and guidance, various policy proposals in Washington, and a patient Federal Reserve.

Although sentiment data can change quickly, evidence is accumulating that uncertainty in Washington may negatively impact business activity. Friday, we received both services and manufacturing Purchasing Managers data, both indicating some deterioration in business expectations for the year.

That said, nothing has dramatically changed our outlook for the year — the economy will continue to grow but at a slower pace, earnings growth will broaden and remain strong enough to push stocks higher, and interest rates will ultimately move lower because of slower growth and monetary policy easing.

U.S. Earnings Season Finishes Strong Though Policy Uncertainty Tempers Forward Guidance

What is happening: The fourth-quarter earnings season in the U.S. is drawing to a close with 90% of S&P 500 companies having reported earnings. Of these, 76% have exceeded profit estimates, a slight improvement from the third quarter. Aggregate year-over-year earnings growth is expected to reach 16.4% for the final quarter of 2024, marking the sixth consecutive quarter of earnings growth and the highest growth rate since the post-Covid rebound in Q4 2021. Revenue growth of 5% remains healthy, supported by management commentary indicating that, in aggregate, consumers continued to spend on goods and services.

However, the overall strength masks a mixed earnings picture under the surface. Sectors such as technology, communication services, and financials reported robust results, whereas materials, energy, and industrials saw earnings contract. Illustrating some of the variation among consumers, Walmart said that it expects overall sales growth for 2025 to be in the range of 3% to 4%, down from 5% last fiscal year. Conversely, the online travel company Booking.com said that it expects 8% gross booking growth in 2025, up from a forecast of 7% for 2024, showing that travel demand remains strong.

Among the mega-cap technology companies, there has been increased scrutiny surrounding artificial intelligence (AI)-related spending plans following the release of the Chinese AI model DeepSeek, which could reduce the need for AI-related capital expenditure. AI-related capital expenditures on semiconductors and data center infrastructure will be a key focus this year as investors increasingly demand evidence of returns in order to support future earnings growth and share price valuations.

Why it matters: Despite a strong finish to 2024 earnings, management guidance for 2025 has remained restrained with only a handful of companies raising their forecast for the year. The caution reflects the uncertainty surrounding future policy, including tariffs and fiscal measures. Nearly half of all management teams have mentioned tariffs on earnings calls, up from a peak of around 30% in January 2018, highlighting the prominence of the issue and the uncertainty it brings. Companies have indicated that future capital expenditure plans could be delayed if uncertainty around tariffs persists.

Looking ahead in 2025, the consensus estimate for S&P 500 earnings now stands at $271 per share, slightly down from the $273 per share forecast before earnings season began but still reflecting a full-year growth rate of 11%. Bessemer’s view is that an overall resilient consumer, supported by a healthy labor market along with easing monetary policy and overall pro-growth policies, will lead to a continued broadening of earnings growth for both large- and small-cap stocks, supporting equity markets in 2025.

Growing Opportunities in Europe Amid Persistent Risks

What is happening: While U.S. markets are off to a positive start to the year with the S&P 500 up 3.9% year-to-date, we are seeing an even stronger start for developed international equities. Notably, MSCI Europe is up 9.3%, though this follows a roughly 16% underperformance relative to the U.S. in 2024.

Heading into the year, the outlook for Europe was less optimistic due to looming tariff risks, but sentiment has moderately improved. Economic surprises have recently turned positive in Europe, natural gas prices have eased, and optimism on a resolution for the Russia-Ukraine war has boosted sentiment. Additionally, hopes have now emerged that tariffs on Europe may not be as severe as feared, given willingness to negotiate on both sides. Furthermore, earnings are expected to accelerate in 2025, following a contraction last year. While areas of improvement are present, the ECB has been cutting interest rates to offset weak growth, and their policy path will be essential to both economic growth and market sentiment.

Why it matters: Bessemer portfolios remain significantly overweight the U.S., currently at 12% above the benchmark. However, since the start of the year, we have modestly increased our exposure to Europe while still maintaining our underweight position. Europe continues to trade at relatively depressed valuations (a P/E of 15.1x in Europe relative to 22.3x in the U.S.), allowing the recent positive shift in sentiment to push stocks in the region higher. We would argue that U.S. fundamentals are still far superior, supporting our overweight in the medium term.

Importantly, stock level dispersion is on the rise and above historical averages. An elevated dispersion rate has created opportunities for Bessemer portfolio managers to invest in select opportunities in Europe this year. Opportunities have ranged across industries from the largest telecom provider in Europe to the largest global fashion retailer. Current valuations have provided an attractive entry point to high quality companies in Europe, particularly as market participation continues to broaden.