by Justin J. Long CFP® on May 5, 2025 10:19:27 AM
Where We Were
2024 followed through on gains in 2023, driven higher by gradual declines in inflation expectations and gradual increases in employment, consumer spending, corporate earnings, and economic growth. Like 2023, 2024 began with Value, SMID and Foreign markets taking the lead, but overcome once again by US Large Cap Growth.
Revenue and earnings growth in the Growth sectors drove performance again, while investors tried to absorb the fundamental realities of lower asset/higher margin within the Information Technology and Communication Services sectors, lamenting higher P/E ratios all year – while equities climbed even higher. Global equity benchmarks rose between 4% and 25% for the year, with the S&P 500 index taking the pole position once more. Developed Foreign equities gained 4%, Emerging markets 7%. Fixed income benchmarks struggled to stay above water last year, except higher risk, higher yielding benchmarks here at home, and foreign government bonds abroad – which were less constrained by inflation concerns. The US Aggregate Bond index gained just 1% last year, equal to investment grade corporate, mortgage-backed, and national muni bonds. High yield bonds carried the year with a gain of 8%, followed by the international aggregate index, up 5%.
Where We Are
Testing support and resistance. The S&P 500 consolidated between 2/19 and 4/7, failing to hold support of its 50/200 MAs. The index reached extremely oversold levels during the final week of March and the first week of April. The SPX rallied strongly after testing support from April 2024. Since April 7, the S&P 500 closed up for 3 of those past 4 weeks, now in a position to test whether its 50-day MA (~5600) will be resistance, or new support.Testing support and resistance. The S&P 500 consolidated between 2/19 and 4/7, failing to hold support of its 50/200 MAs. The index reached extremely oversold levels during the final week of March and the first week of April. The SPX rallied strongly after testing
support from April 2024. Since April 7, the S&P 500 closed up for 3 of those past 4 weeks, now in a position to test whether its 50-day MA (~5600) will be resistance, or new support.
The US Aggregate Bond index is up 2% YTD (60/40 is only off -1.2%). The 10-year T-Note yield is at 4.2%, even with a month ago.
Q1 Results. With 65% of S&P 500 constituents reporting, 60% exceeded revenue estimates, with 4.5% y/y growth vs. the 5.1% forecast at the beginning of Q1. 76% of companies have beaten EPS estimates, with average growth of 15.5% vs. the 11.6% expected.
S&P 500 earnings expectations. For 2024, actual EPS was $240/share, up 12% vs. 2023. The 2025 estimate is $264 (+10%), down from $269 last month. The 2026 estimate is $301 vs.
$307 (+14%), with 2027 at $338 vs. $344 (+12%). Each of the annual consensus estimates are off -2% over the past month.
P/E ratios for those estimates are 21x, 18x, and 16x. The P/E-to-Growth (PEG) ratios are 2.1, 1.3 and 1.3. The average EPS growth rate over the past 25 years is 11%; the average P/E and PEG ratios are 21x and 1.9. The consensus price target for the SPX is 6543 vs. 6908 a month ago and 6942 sixty days ago, for an implied total return of +18% from its current level.
Where We’re Headed
The S&P 500 has rallied +15% since the intra-session low on April 7. We got through most of February with a relatively minor consolidation (-1.5%), as news was quite fluid and Q1 was not yet finished. As March ensued, corporate and personal habits began to change and the tone became much more negative, and markets responded: the S&P 500 was off -6% for the month and -4% YTD. There was still some hope for a quick-ish resolution to new tariff policy. But by the first week of April, the S&P 500 had corrected -21% from its previous all- time high of 6144, if one includes the intra-day low of 4835 on April 7. But the SPX rallied later in the session to close at 5062, making the actual correction -18% over seven weeks.
Then we saw a positive reversion to the mean. The Nasdaq 100 has rallied +18% of its 52-week low. The Information Technology sector has rallied by +22%; Communication Services +22%; Financials +21%; Utilities +19%; Consumer Discretionary +18%; Industrials +16%; Real Estate +15%. As of April month end, the S&P 500 is off -5.1% YTD. While foreign equity markets still lead for the year, within the US markets Large Cap has retaken the pole position, again a flight to quality/safety vs. small cap given domestic spending concerns.
It's entirely possible we’ve seen the bottom of this correction already. Technical tests are yet to come. But for those who did decide to try to time the combination punch of 1) selling at the perfect time, and 2) buying back in at the perfect time, they had about a week after March end. On a daily basis, they had to get it right within 3 trading sessions after April 4. As of today, the SPX is off -9% from its all-time high and just -5.1% YTD, and a globally-diversified equity mix (ACWI) is off just -0.4% YTD. The US Aggregate Bond index is up +3.2% YTD. So for your 60/40 with only the S&P 500 in the equity column, a portfolio is actually flat for the year. If a portfolio has some foreign equity, or any of our individual equity models in the mix, the returns are better. This, friends, is yet another example of why we invest rather than speculate, and don’t day trade our positions and strategies.
Source: StockCharts
Estimates have come down across the board as a result of tariff uncertainty. But not as much as you might think, and probably not for good. For the S&P 500, annual EPS estimates for 2025, 2026 and 2027 have come down about -2% during the past month, when the downside market volatility was at its worst. They still reflect annual growth of 10%, 14% and 12% over the next three years, on top of the 10% last year. Meanwhile the trailing P/E has compressed from 28x to 24x, bottoming at 22x. The forward P/E for 2026 fell by -25%. In other words, valuations have compressed much more dramatically from their February 19 level than earnings estimates have.
The graphs reflecting EPS trends for the S&P 500 below may look more dire because of the scale. The most severe is for Q2 2025 – next quarter – which have declined from $68 to $64 since last August. But that was before the election and trade issues. If we look at the change in the Q2 EPS projection since the beginning of the year, also before the tariff focus, the estimate has declined from $66 to $64: a -3% adjustment.
As noted above, with 65% of the S&P 500 companies reporting Q1 results, the average earnings growth is 15.5%, vs. the 11.6% expected. 80% of companies are have either beaten estimates (76%), or been in line (4%).
Note that analysts are notorious for being more positive on earnings before a calendar year starts and estimates normally tend to drop a bit starting in January. It’s a little of inside baseball, but also helps support the perspective that recent market activity has not been all about tariffs. We believe much has been due to a needed consolidation following exceptional equity performance, and normal analyst adjustments.
We’re still in a self-fulfilling prophecy mode, whether for good or ill. Shakespeare said, “man is a giddy thing”, and he knew of which he spoke. Unpredictable, and prone to the proverbial “animal spirits”. Take a look at this month’s Econ/Market slide deck and you’ll see a recurring theme with regard to estimates for spending, growth, and employment. They are all down over the past month or so. The largest revision has been to Q1/Q4 real GDP (page 6), which has declined from a 1.9% rate to -0.3% (first preliminary estimate released yesterday). The year/year growth was +2.0%. Q2 is still estimated at 1.5% (down from 2.0%), so technically no recession (requires 2 consecutive quarterly declines). But that may change for the worse, depending on all y’all. Me and my house have not retreated into the bunker. At this point it appears equities have priced in a drop in Q1 fortunes with a bounce in Q2, but despite some give-and-take potential on tariff policy, better-than-expected earnings, and a rebounding market, it will take folks believing all has not come to hell in a hand basket for upward mobility to continue. In the meantime, look for the SPX to start testing its 50-day MA (after 3 of 4 up weeks and 7 straight up sessions, 800 points of the low), and try not to let the volatility get you down.
Sources: Morningstar, Factset. Performance data represents past performance and is no guarantee of future results. This material has been compiled from sources deemed reliable; it is not guaranteed as to its accuracy and does not purport to be complete. All information contained herein is subject to change without notice. The information is not intended to be used as the basis of investment decisions. Intended for adviser use only.
