January 2025 Market Review: Key Insights and Highlights

Introduction

Welcome to the Actively Passive Dad January 2025 market update! This month has been filled with significant events and developments impacting the financial markets. From President Trump's new executive orders to the latest earnings reports, I've got you covered with all the essential information. Let's dive into the key highlights and what they mean for investors.

The Presidential Inauguration

President Trump began his term with a record-setting 26 executive orders on day one, signaling his readiness to implement immediate and significant structural changes. Since then, a total of more than 60 executive orders, proclamations, and memoranda have been signed in the White House. Diversity, equity, and inclusion (DEI), energy, immigration, tariffs and technology were some of the key areas of focus. I don’t recommend picking stocks solely based on the unknown and uncertain impacts of political policies, but let’s quickly highlight some of President Trump’s efforts and how they could impact markets:

• DEI:

  • This order creates uncertainty for investors prioritizing environmental, social, and governance (ESG) factors, negatively shifting sentiment.

  • Conversely, it could be beneficial in the sense that companies spend a significant amount on hiring, legal, and compliance costs to address DEI-related issues.

• Energy:

  • The rollback of climate-change initiatives, withdrawal from the Paris Climate Agreement, and increased focus on natural gas production in Alaska could increase oil and gas supply, leading to lower energy prices.

  • This is positive for inflation but would pressure revenue and earnings of major energy producers.

  • I always hear people tout that we are already the top producing oil producer globally, but people quickly forget that much of our domestic production is light sweet crude oil, which is easier to refine, but not always compatible with existing refinery infrastructure. We still import oil for many reasons.

• Immigration:

  • Could significantly negatively impact sectors heavily reliant on immigrant labor, such as agriculture, construction, and hospitality. It could open jobs for American workers, but it also could reduce our labor supply, possibly causing labor shortages, and thus higher wages (inflation). It could also shrink consumer spending.

  • On the positive side, it could enhance national security, reduce public spending, encourage legal immigration, and promote economic stability.

• Tariffs:

  • President Trump is set to impose 25% tariffs on Canada and Mexico, and a 10% tariff on China, starting Saturday.

  • Tariffs protect domestic industries from foreign competition by making imported goods more expensive and can lead to more domestic job creation.

  • They generate revenue for our government and give us trade negotiation leverage.

  • However, they could lead to higher prices and higher inflation for consumers as companies pass on higher costs. They can also spark trade wars.

  • Sectors or industries, such as the automotive, electronics, machinery and equipment industries, which are heavily reliant on imported materials or components may be significantly impacted.

• Technology:

  • Could continue to push artificial intelligence (AI)-related stocks higher as restrictive policies are removed and action plans are implemented.

  • Investment spending on AI is also expected to significantly increase.

  • The pullback of regulations and increased competition we are seeing out of China could result in increased market volatility in AI-related names.

Returns of the Market

The U.S. stock market, as measured by the S&P 500® TR Index, continued to rise in January despite delivering over 20% returns in consecutive years. As I write this post, just before the market closes on January 31st, the S&P 500® appears slated to finish the month in the high 2% range. Annualizing that (which I don’t recommend doing) would imply another year of returns over 20% for the S&P 500® in 2025.

The Information Technology (IT) sector is slated to be the only sector in negative territory for the month, a stark contrast from the dominance it exhibited in the year prior. DeepSeek, a Chinese AI startup, released its R1 model in January, and showed signs of being a major competitor to leading U.S. AI models, such as ChatGPT, at a fraction of the cost. This revelation shook investor confidence in U.S. tech companies, particularly those heavily invested in AI, like Nvidia. The market quickly priced in the potential for reduced competitiveness and profitability of U.S. tech giants, leading to a significant drop in tech stock prices.

Large names that contributed to the market’s strong returns in January include Meta Platforms (Communication Services) and JPMorgan Chase (Financials). Meta surpassed analyst expectations in the quarter and received upgrades from analysts covering the stock. JPMorgan delivered robust Q4 2024 earnings, driven by increased investment banking fees and trading activity.

4Q24 Earnings Season: High Hopes and Early Success

The 4Q24 earnings season has started strong, despite high expectations for a U.S. equity market that continue to rise. Early reports indicate robust corporate profits, with the S&P 500 projected to see low double-digit year-over-year growth in earnings per share. Financials outperformed, as noted above, driven by large-cap banks benefiting from increased investment banking fees and trading activity. However, sectors like industrials, energy, and materials continue to face earnings challenges.

Market Reactions to Economic Data and Policy Announcements

In the first week of 2025, equity markets pulled back in response to a strong jobs report, raising concerns that the Federal Reserve (Fed) might hike rates again. Strong jobs reports can indicate more people are employed and the economy is doing well, which can result in more spending on goods and services, and thus the possibility of higher inflation. The Fed raises rates to make borrowing more expensive and slow down spending and investment so that the economy doesn’t run too hot.

We learned that Fed’s preferred inflation measure, the personal-consumption-expenditures (PCE) price index, rose by 0.3%, leading to a 2.6% increase for 2024. Core PCE, excluding food and energy, increased by 2.8% over the past year, stalling for the third consecutive month. The Fed aims for a 2% target but expects it could take until 2027. The stubborn and slower progress has led the Fed to pause interest rate cuts, aligning with economists' forecasts.

The VIX index, a measure of the market’s view on expected volatility, hit a three-week high, and the US 10-year yield spiked to 4.79%, its highest level since November 2023.

Conclusion

January 2025 was a strong month for markets, despite significant policy changes, economic data releases, and corporate earnings reports adding uncertainty. I remain concerned about the market’s current valuation level and AI, crypto, and meme-coin exuberance. The DeepSeek news was a stark reminder of how quick sentiment can change when market uncertainty picks up. Stay vigilant, disciplined, and focused on fundamentals!

Sources:

WSJ: PCE Inflation Accelerated in December

Edward Jones: Weekly Market Wrap

JPMorgan: What is the outlook for 4Q24 earnings season?

JPMorgan: Weekly Market Recap

Disclaimer:

This presentation is proprietary and should not be shared with parties, used, or re-created without prior written approval from Actively Passive Dad. The presentation and the data herein is copyrighted by Actively Passive Dad.

The information provided in this blog post reflects my personal opinions and does not represent the views or opinions of my employer. This content is for informational purposes only and should not be considered as investment advice. Such views are subject to change at any point without notice. The information in this blog post should not be considered investment advice or a recommendation to buy or sell any types of securities. Readers are encouraged to conduct their own research and consult with a financial advisor before making any investment decisions. Some of the information provided has been obtained from third party sources believed to be reliable, but such information is not guaranteed. I have not considered the investment objective, financial situation, or needs of any individual investor. There is a risk of loss from an investment in securities, including the loss of principal. Different types of investment involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable or a particular investor’s financial situation or risk tolerance. Any forward-looking statements, opinions, or forecasts are based on assumptions and actual results may vary. No reliance should be placed on, and no guarantee should be assumed from, any such statements or forecasts when making any investment decision. Past performance does not indicate future results.