S&P 500 Needs AI To Deliver Earnings In 2025
Inflation Concerns Impact The S&P 500
In our last post, we indicated that the S&P 500 needed a catalyst to close above 5955 and that the catalyst could be employment data.
The employment data was a catalyst, but not a positive catalyst, as the S&P 500 corrected to the downside on Friday in response to a strong Nonfarm Payroll report.
Strong economic and employment data and inflation concerns have significantly reduced the expectation that the Federal Reserve will cut interest rates in the first half of 2025.
The inflation concerns are mirrored in U.S. dollar strength and increasing U.S. 10-year bond yields.
Key Data For The S&P 500 This Week
The focus this week will be on the inflation data. Producer Price Inflation (PPI) is reported on Tuesday, and Consumer Price Inflation (CPI) is reported on Wednesday.
The S&P 500 is in negative gamma and technically bearish. Further correction to the downside in the S&P 500 this week can’t be ruled out. If the S&P 500 sells below 5700, it could cascade further.
S&P 500 Earnings
We are about to enter earnings season. All eyes will be on earnings reported by stocks in the S&P 500 for the last quarter of 2024 and, importantly, the future guidance for 2025.
Market analysts are positive about further growth in the S&P 500 in 2025. The problem with market analysts is that they default to momentum. The S&P 500 was up 25% in 2024 and 24% in 2023, so it must go up 20%+ in 2025.
However, the S&P 500 is in record territory in price and near record territory in valuations.
Most investors don’t use stock valuations as a timing tool, and that makes sense. Investors are more sensitive to earnings.
Valuations are expectations of future performance and high valuations don’t mean the S&P 500 can’t go up another 20% in 2025.
At some point, however, that momentum may stop working. It can stop working without warning and reverse badly.
Mega-cap stocks account for one-third of the S&P 500’s value and delivered half of its growth in 2024, which is unprecedented.
When increasing returns in the S&P 500 come from a small, concentrated number of stocks with high valuations, it increases the risk associated with those concentrated returns.
AI Earnings
AI expectations, in part, drive mega-cap valuations.
Is AI coming? Yes.
Will AI be more significant than the Internet? Yes.
However, that alone will not drive mega-cap performance in 2025. Investors want to see returns on AI investment by the end of 2025 or early 2026. They want to see business models and lifestyle changes driven by AI in the next twelve to fifteen months that drive the returns on investment.
If that doesn’t happen, then the momentum of mega-cap stocks may turn.
It was the absence of returns on invested capital that crashed internet stocks.
If momentum in the mega-cap stocks turns, it could be painful for the S&P 500.
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