January 2025 - Market Update

Data Dashboard

Stock Market

All broad US stock market indexes rose in January. The equal weighted S&P outperformed the S&P 500 market-cap weighted index by 66bps. Developed international stocks returned 5.27%, boosted by the European Central Bank (ECB)'s rate fifth rate cut in seven months.

Health Care and Financials were the best performing sectors. Technology was the worst performing sector for the month.

Financials reported the best year-over-year earnings growth of any sector. About 36% of the companies in the S&P 500 have reported earnings for Q4 2024, of which 77% beat earnings estimates.

Chinese AI company DeepSeek had a huge impact on US big tech, leaving investors questioning the gargantuan investments into AI models and infrastructure. DeepSeek claimed to have achieved results similar to ChatGPT creator OpenAI's models, at a fraction of the costs and with inferior chips. The resulting selloff sent large cap technology stocks down 5.6% on January 27, with Nvidia dropping 17% and losing $600 billion in market cap, the largest one-day loss in US history.

Investors should look out for big tech earnings & AI capital expenditure guidance in the coming week.

In general, the market has been more optimistic on positive earnings surprises, and less pessimistic on negative ones.

January Monthly Returns (by US Sector)

Bond Market

Bond yields remained relatively steady throughout January, and longer term bonds outperformed shorter ones. High yield corporate bonds returned 1.35%, outperforming investment grade corporate bonds by 80bps. Currently the high yield spread is hovering around 2.61%, offering investors very low additional yield to take on higher credit risk.

The breakeven rate for 2-year Treasury-Inflation-Protected-Securities (TIPS) rose sharply, ending at 2.94% up from 2.60% at the end of 2024.

Economics

Although the 25% tariffs on Mexico & Canada have been postponed for a month, the 10% tariff on China went into effect on February 4. In retaliation, China also imposed tariffs on select American imports, launched an antitrust investigation into Google, and added two American firms to its "Unreliable Entities list".

Canada is the largest exporter of oil & natural gas to the US. Mexico is a manufacturing hub for US & foreign car manufacturers. Tariffs would affect energy prices, and the global supply chain remains very uncertain.

GDP came in at 2.5% QoQ annualized, and the Fed's preferred inflation gauge (Core PCE) came in at 2.8% YoY. The unemployment rate dipped back to 4.1%. We do not expect inflation to come down to the Fed's target of 2% anytime soon, with the effect of tariffs still extremely uncertain.

January Economic Dashboard

Tactical Portfolio Changes

We pushed a major change to our tactical stock portfolio to now hold 44 positions, equally weighted across 11 sectors. We have revised our tactical stock universe, narrowing focus to liquid stocks within the Russell 1000 index. Given the growing concentration of the S&P 500 in a few large technology stocks, our research findings suggest that adopting a sector-equal weighted approach is a more balanced and effective strategy.

Our tactical ETF & Fixed income portfolios remained unchanged in January. However, we anticipate rolling out changes to both portfolios.

General Client Considerations

2025 IRS annual contribution limits for 401(k), 403(b), most 457 plans and Thrift Savings Plans (TSP) increased from $23,000 to $23,500. Changing your elections at the beginning of the year can help spread out contributions evenly, and ultimately maximize your tax advantaged retirement savings. If you are participating in a company sponsored retirement plan and maxing out your contribution, please reach out to your HR department to ensure your contribution amount has been updated to reflect the new maximums.

Additionally, if you are 50 or older, the catchup contribution limit for 401(k), 403(b) and TSPs has remained the same at $7,500. If you are born in 1975 or earlier, you can contribute up to $31,000 to these accounts in 2025. You do not have to wait until your 50th birthday to make catchup contributions - the contributions can start on January 1st of the year you turn 50.

Starting 2025, if you are aged between 60-63, you can contribute up to a total of $34,750 (eligible for a higher catch-up contribution due to SECURE 2.0).

For more information, check out our newsletter on 2025 Retirement Account Limits.

As always, reach out with any questions or concerns.

Thanks,

The Friedenthal Financial Team

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