As earnings season nears its end, we want to dig through some of the noise and evaluate additional data to further crystallize our 2025 visibility from a fundamental standpoint.
Right now, we at Cornerstone wonder if investors may be too cautious. As the Wall Street adage goes, “Never short a dull market.”
On the surface, what does this mean?
First, the CBOE Volatility Index# (VIX), dubbed the market’s “fear gauge,” has seemingly handled a series of intraday spikes to start 2025. It’s now settling back towards the 15 level, which is historically associated with calmer markets:
Over the past couple of weeks, the S&P 500* has seen multiple intraday pullbacks only to find investors stepping in to “buy the dip”:
We believe this intraday action reaffirms the market’s fundamental resilience despite policy-related concerns.
More evidence of the market’s resilience and fundamental strength is the fact that as of this writing, about 48% of stocks are outperforming the broader S&P 500:
This is a significant improvement compared to the narrow leadership over the past two years. And let’s be clear: the increased breadth is a sign of overall strength that’s being supported by earnings season (more on that later).
Remain Focused on Data
This week's data dive is important because for a lot of people, daily headlines are unsettling and challenging on many levels. I recently reminded myself that I have no control over headlines or what happens, but I can control our process, data research, and analysis.
So, it's important to note how the stock market hasn't yet seemed to care much about jarring headlines around tariffs and dubious geopolitical proclamations.
These things could fill an entire presidential term, yet they’ve occurred in just a few weeks. Still, the market doesn’t seem to mind as it’s near all-time highs:
That said, we must acknowledge that historical data exists regarding whether the current administration actually is or isn’t associated with market volatility. In its first term, even with the frantic daily headlines, the administration had the lowest volatility since 1997:
Thus, historical context doesn't indicate significant volatility risk and is currently consistent with the VIX chart above – volatility isn’t high right now. So, for us it reinforces remaining focused on data and underlying fundamentals.
Extraordinarily Strong Corporate Fundamentals
Earnings season has been strong.
Continuing on last week’s strength, as of this writing, 86% of S&P 500 companies have reported results. Of them, 79% outperformed their earnings estimates, which beats the 10-year average of 75%.
Most importantly, there’s continued increasing strength in the earnings growth rate. It’s now at 16.9% for the quarter (even better than last week’s 16.4%).
This is reflective of extraordinarily strong corporate fundamentals. In fact, nine of the 11 sectors are reporting year-over-year earnings growth, with six of them hitting double digits:
Furthermore, the blended quarterly revenue growth rate for the S&P 500 currently stands at 5.2% year-over-year – much higher than the initial expected growth rate of 4.6%:
If it stands, it will mark the 17th consecutive quarter of revenue growth for the index.
We’ve acknowledged before how we think it’s in analysts’ best interests to produce conservative estimates. That regular underestimation builds in a bullish bias of sorts, which is good with us.
Market Action Impact on Rates
Knowing that earnings are working, let’s discuss interest rates.
We know the latest consumer price index (CPI) report was hotter than expected. But there are things to keep in mind to help understand why there wasn’t a significant jump in interest rates as a result.
First, CPI was stronger due to shelter, energy, and food costs.
This can mostly be attributed to rising egg prices thanks to the bird flu, and energy spiking from a short-term increase in fuel oil last month. Still, fuel oil is down 5.3% overall for the past 12 months.
Also, shelter was hot almost exclusively due to owners’ equivalent rent. Our readers know that’s not the most reliable data available.
It’s also important to keep in mind how much CPI has fallen from its 9.2% high, especially with the context that the federal funds rate remains substantially above CPI:
As the chart shows, that’s an anomaly. Markets will equalize over time.
Third, global rates will fall as parts of Europe are currently in a recession and will continue cutting rates the same as China is currently cutting. This global market action will force our rates down as well.
And finally, as we’ve written about previously, the Federal Reserve’s stated long-term goal of 2% inflation is simply unrealistic. The 64-year average rate of inflation is 3.76%. As it stands, we're below that figure.
Money Flows Look Inherently Bullish
What do “big money” stock investors tell us about current worries?
First and foremost, institutional inflows have outnumbered outflows in stocks to start the year:
The same is true with exchange-traded funds:
Thus, money flows look inherently bullish. This action has pushed MAPsignals’ trusty Big Money Index (a 25-day moving average of “big money” buys and sells netted) higher:
This indicates strong underlying investor conviction from the “smart money”.
Even diving under the surface into specific sectors, we're not seeing hidden pockets of weakness. Rather, we're seeing strong inflows of unusually large buying, especially in financials, technology, utilities, materials, staples, and health care.
To wrap up, let's address data we haven’t discussed in a while – the incredible amount of cash still on the sidelines:
That Fed chart shows there's almost $7 trillion still sitting in money market accounts. It’s waiting to be put to work when rates fall to levels that will make money market accounts significantly less attractive.
Most interesting though to us is that the recent surge in money market balances is almost exclusively driven by retail investors as they have added $40 billion to money markets over the past three weeks compared to only $1 billion by institutions. This is historically bullish when retail turns more cautious comparatively.
Yes, change can be understandably tough sometimes. However, it’s also an important time to remind ourselves of what we can and can't control.
For us, the best (and only) thing we can do is analyze the data objectively and react accordingly. For now, we'll continue to ride the wave higher.
* Links to third-party websites are being provided for informational purposes only. CoreCap is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors. CoreCap is not responsible for the content of any third-party website or the collection or use of information regarding any websites users and/or members.
*Past performance does not guarantee future results.
*Investing involves risk and you may incur a profit or loss regardless of strategy selected.
# The CBOE Volatility Index is a measure of the short-term volatility of the S&P 500 indexes, indicating how quickly market sentiment changes and the level of investor confidence or fear in the market.
* The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
Securities sold through CoreCap Investments, LLC. Advisory services offered by CoreCap Advisors, LLC. Cornerstone Financial and CoreCap are separate and unaffiliated entities.