We’re in a new month of 2025 and entering the heart of earnings season. At Cornerstone, we think it’s a sign of strength that the S&P 500* is up slightly recently in the face of two “negative shocks” (DeepSeek and tariffs) that many though each could drive 5-10% corrections on their own.
Our biggest takeaway from the past couple of weeks is that equity markets in 2025 are demonstrating the same resilience they showed in 2024 and 2023. So, even when we brace ourselves for markets to go “risk off,” we philosophically remain in the “buy the dip” camp when we see “fire, ready, aim” panic events.
We see five main reasons to support this position.
First, last week’s tariff tantrum is really part of the war on drugs, not an actual trade war. This is an important distinction and was made clear by the statement from the White House, which focused on illicit drugs, not trade practices:
The set of already now-lifted tariffs was a distinct contrast to those imposed in 2018 during President Trump's first term which were part of actual trade wars:
- January 2018, 30%-50% tariffs on solar panels and washing machines.
- March 2018, near across-the-board tariffs for steel (25%) and aluminum (10%).
- June 2018, tariffs on Europe, Canada, Mexico, and China led to an actual trade war.
Why are we making this important distinction?
While some people suggest the end result of the tariffs is the same, we disagree as the lifting of these sanctions is arguably more flexible. Thankfully, that’s what we saw when the Canadian and Mexican tariffs were put on hold after being in place for barely half a day.
The second reason we’re ready to buy the dip is because of the head fakes that arise when there’s panic. As we saw two weeks ago, the DeepSeek fiasco is another reminder that markets emotionally overreact. They often follow that a quick reversal as emotion subsides.
Third, last week's release of the Institute for Supply Management’s (ISM) Manufacturing Index for January is important. This new data supports increasing economic strength as it exceeded 50 for the first time in 26 months, which reflects growth (below 50 reflects contraction):
We theorized that the index might go past 50 a couple weeks ago, and it turned out to be true. As we pointed out, that has led to strong forward earnings growth.
Furthermore, as the chart below shows, small business optimism is rising quickly. Historically, this has been a leading indicator, moving in tandem or slightly ahead of the ISM Manufacturing Index.
Fourth, the current earnings season is still doing extraordinarily well, and it’s been quite busy. Last week’s earnings release calendar was the most packed of the season.
So far, earnings are outpacing historical averages as some sectors notably shine:
Our last data point supporting objective calmness while panicked investors hit the exits is the labor market. More specifically, last Tuesday the December Job Openings and Labor Turnover Survey (JOLTS) showed job openings fell to 7.6 million versus a consensus expectation of 8 million:
This is the second lowest reading since the pandemic and a sign the job market is slightly cooling. This matters because it’s another sign of weakening inflationary pressures. The continuing trend of lower inflationary data contradicts bears who opine that inflation is about to roar back.
All that said, we must acknowledge that the S&P 500 has found a trading range (especially in the short term). It’s from a few points above 6,100 to a few points below 5,800:
Knowing February is a seasonally weak month, it’s possible the index could test 5,800 again. Should that happen, it could be the result of too many tariffs being applied too quickly on too many countries.
But let’s be clear: it's impossible to speculate at this point, especially considering the swift tariff turnaround recently.
It’s still early in his second term, but in the first Trump term, there were plenty of tariff surprises. This time around, the tariffs seem more targeted, and they’re being communicated rather clearly in advance. The overall intent thus far is different too (e.g., drug war versus trade war).
Perhaps it’s a different strategy overall. Time will tell.
Meanwhile, we’ll continue being objective when the data is strong while panic sets in for others. These moments are opportunities. And you can take advantage of them when you’re thinking long-term and have a data-based plan supporting you.
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*Past performance does not guarantee future results.
*Investing involves risk and you may incur a profit or loss regardless of strategy selected.
* The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
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