Signal or Noise

This week, the presidential inauguration and subsequent flurry of executive orders left investors deciphering what is ‘signal’ versus ‘noise’. Fortunately, in the background, public companies have started reporting fourth quarter earnings and reveal expectations for the year ahead. While still early in the season, the results are promising and provide investors with a bit more clarity as they navigate an uncertain landscape.

As is customary, financial institutions, such as Goldman Sachs, J.P. Morgan and Wells Fargo, were some of the first companies to report fourth quarter earnings results last week. It was a stellar quarter for all three companies, and, in general, an encouraging sign for the banking industry. After a furious post-election rally fueled by the prospects of deregulation, banks stocks retraced most of those gains as the prospect for additional cuts to short-term interest rates came into question. If short-term rates stay higher for longer, funding costs remain high and banking activity slows, which can negatively impact profitability.

Overall, results and commentary from money center bank management teams have calmed these fears for now - sending the stocks back towards their post-election highs. Specifically, management teams pointed to investment banking pipelines increasing as well as an increase in CEO confidence post-election on the earnings calls. While uncertainties persist regarding the path of Fed rate cuts, the steeper yield curve environment led many banks to raise their net interest income forecast as fixed rate securities reprice higher throughout the year and deposit costs have peaked.

On the credit front, we expect commercial real estate loan charge-offs, particularly office loans, to remain episodic in nature but banks are well prepared to address these issues as they arise. For consumer loans, credit losses now exceeded pre-pandemic levels but are nearing their peak as the rate of delinquent payments is slowing and employment levels remain healthy.

With the better-than-expected results from financial stocks, the S&P 500 earnings are now expected to grow 12.8% compared to the fourth quarter of 2024, which would be the highest year-over-year growth rate reported by the index since 2021. While the “Magnificent 7” will play a significant role (yet again), profitability is broadening among the remaining 493 stocks in the S&P 500 which are now expected to grow earnings 9.7% this quarter – marking the highest earning growth rate for this cohort since the second quarter of 2022.

As shown in the chart below, over the past two years, the remaining 493 stocks have grown profits by a mere $1 billion while the “Magnificent 7” has fueled the index earnings the last two years, growing profits by $223 billion. As we move into 2025, we expect a broadening of profits, which is a healthy and needed development for the stock market to continue to post positive returns.

Takeaways for the Week

• The stock market took the political news in stride and continued its upward momentum from last week with the S&P 500 closing at its first all-time high since December 6th of last year on Friday

• S&P 500 fourth quarter earnings are off to a strong start and expected to grow 12.8% compared to the fourth quarter of 2024

• Next week will be a busy week of earnings announcements, revealing an additional 40% of the S&P 500 market cap reporting, headlined by Apple, Amazon, Microsoft, Meta and Tesla

• After two years of anemic profit growth, the “other” 493 names in the S&P 500 index are expected to grow profits by $208 billion this year

Disclosure

*The views expressed represent the opinion of Ferguson Wellman. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Statements of future expectations, estimates, projections and other forward-looking statements are based on available information and Ferguson Wellman’s views as of the time of these statements. Past performance may not be indicative of future results. Ferguson Wellman, Octavia Group and West Bearing do not provide tax, legal, insurance or medical advice. This material has been prepared for general educational purposes only and not as a substitute for qualified counsel who can determine how this information applies to you. We believe the information provided is from reliable sources but should not be assumed accurate or complete.

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