Wentz Weekly: Earnings Growth Slows

Wentz Weekly Insights
Earnings Growth Slows for 2025

Markets opened the holiday shortened week on a positive note and hit fresh record highs. However, markets ended up selling off the last two days of the week resulting in a 1.7% weekly decline for the S&P 500 and a nearly 4% drop for the small cap Russell 2000 index. The Nasdaq saw a decline of 2.5% after some sizeable declines in several Magnificent 7 names including a 7.2%, 5.3%, and 5.1% decline for Meta, Amazon, and Tesla, respectively.

Treasuries moved higher as yields fell to the lowest level of the year as there was a small increase in the concern around growth.

What triggered the pullback in stocks and move higher in bonds was the earnings report from Walmart. The company actually had a solid quarter that beat the street’s estimates. However, it was the outlook that worried investors. It forecasted sales growth of 3% to 4%, below the analysts expectation of at least 4%, with its profit forecast 8% below expectations. Walmart said it was prudent for it to take a somewhat measured approach so early in the year given the unpredictability. Walmart is the largest retailer in the world and an indicator for consumer spending, so has a large impact on the overall markets. In fact, it generates the second highest annual revenue in the world (it was number one for a long period of time but just surpassed by Amazon this past quarter).

It is important to keep things relative though. Walmart shares were up over 75% the past year, outpacing even the Magnificent 7 stocks, and one of its best stretches ever. In addition, expectations have been elevated, if companies can’t meet already elevated expectations that is a recipe for a pullback.

One thing we have seen this earnings season is companies that have provided disappointing earnings have been hit harder than usual. Bespoke reported this earnings season 13 companies have increased at least 15% the day after reporting earnings, while 16 have declined more than 15% after reporting earnings.

That is something that has developed more throughout this past earnings season. It is typically the case that earnings estimates for the year ahead start high, and as we progress through the quarter/year they move lower. However, this earnings season forward projections have moved lower by a larger amount than average.

Bloomberg notes a measure of forward earnings that compares companies’ forecasts with analysts’ projections is the lowest level since 2016, suggesting markets and analysts are too optimistic on earnings growth or growth rates in US companies are slowing. Based on recent commentary, it could also be companies are providing a more conservative forecast due to the increasing uncertainties around tariffs and how that will impact business conditions.

According to FactSet, first quarter sales growth guidance has moderated to +4.4% from the initial estimate of +5.5%, while Q1 EPS (earnings per share, the widely used measure of company profits) growth is now expected to be +7.6% from the initial 13.8% expectation when the quarter started January 1. Full year 2025 estimates have moved lower as well – with estimates of $269 of earnings per share for the S&P 500, it is down from $275 and the lowest estimate since January 2023.

This would still reflect earnings growth of about 12%, which is solid, but the chance of future profits moving lower is a risk in the markets. With stocks nearly priced for perfection, cautious guidance from companies is a key risk we will continue to follow.
 
Week in Review:
U.S. stocks moved lower in the holiday shortened week due to a selloff Thursday and Friday, but it wasn’t before a strong open to the week when markets hit new highs. The hottest sectors of the year saw the largest decline last week, with consumer discretionary and tech the underperformers. The major U.S. indices finished as follows: S&P 500 -1.66%, Dow -2.51%, Nasdaq -2.51%, and Russell 2000 -3.71%. Treasuries moved a little higher over economic slowdown concerns as yields moved to the lowest of the year. The 2-year Treasury yield fell 7 basis points to 4.20% while the 10-year yield fell 5 bps to 4.43%. The dollar index was relatively unchanged while gold rose 1.9% to a new high. Bitcoin has found a tight range between $95,000 and $100,000 while falling 1.4% for the week. Oil fell slightly despite a Ukraine attack on Russian pipelines and talks of another delay by OPEC to resume oil production increases.

Recent Economic Data

• Housing Starts: The Census Bureau said there were 1.366 million housing starts (at a seasonally adjusted annualized pace) in January, which was 9.8% below December’s rate, when housing starts surged for the month, and 0.7% below the rate from a year ago. The number of permits for new home builds were relatively unchanged in January at 1.483 million and about 2% below the year ago level. The very cold January could be to blame for the pullback in homebuilding. There appears to be a focus by homebuilders on completing homes as completions rose 7.6% and now at a faster pace than during the Covid boom, but the number of homes under construction is down almost 16% over the past year. We need to see this number pick up to help the severe undersupply of homes and to see a rebound in home building.

• Existing Homes Sales: Existing home sales fell 4.9% in January to a seasonally adjusted annualized rate of 4.08 million, however up about 2% from a year ago. Stubbornly high interest rates, despite a couple Fed rate cuts, and elevated home prices are making affordability a key challenge for potential home buyers. Total housing inventory improved another 3.5% in the month, and 17% higher from a year ago, to 1.180 million homes. The median existing home price is up 4.8% from a year ago to $396,900. The number of sales that come from all cash buyers accounts for 29% of all sales which is still historically high but down from 32% a year ago, while first time homebuyers accounted for 28% of sales, the same as a year ago but still well below the historical average of 42%.

• Empire State Manufacturing Index: The Empire State Manufacturing index was 5.7 for February, returning to expansion territory after a -12.6 in January. The report noted a moderate increase in new orders and shipments while employment declined slightly and prices accelerated to the fastest increase since almost two years. Overall, firms expect conditions to improve in the months ahead, although optimism declined “noticeably.”

• Philly Fed Manufacturing Index:The Philly Fed Manufacturing index was 18.1 for February, a slowdown from 44.3 for January which was an very unexpected spike for the month, but overall two consecutive months with these readings is a positive. The report noted 41% of firms reported increases in activity (down from 51% last month), 23% reported declines, while 35% reported no change. The employment index grew slightly with 85% of firms reporting no change in employment levels while firms continue to report overall price increases, similar to the Empire State report, the prices index rose to its highest level in over two years.

• Jobless Claims: The number of jobless claims the week ended February 15 was 219,000, an increase of 5k from the prior week and brings the four-week average to 215,250. The number of continuing claims increased 24k to 1.869 million with the four-week average remaining in a tight range at 1.862 million

Company News

• Intel: Reports have emerged that Broadcom and Taiwan Semiconductor (TSMC) are considering deals that would break Intel in two. According to the Wall Street Journal, Broadcom has been closely examining Intel’s chip design and marketing business and has informally discussed making a bid, but reportedly will only do so if it finds another partner for Intel’s manufacturing business. That’s where TSMC, the world’s largest semiconductor manufacturer, comes into play. The report adds TSMC has studied controlling some of or all of Intel’s chip plants. As the WSJ says, “Splitting the company would also bring it in line with an industrial shift in recent decades toward specializing in either manufacturing or designing chips, but not both.”

• Southwest Airlines: Southwest announced it plans to cut about 15% of its corporate workforce, equal to about 1,750 jobs in effort to cut costs. The job cuts are focused on corporate overhead and leadership positions and are expected to take place by the second quarter 2025 and expected to save $300 million.

• Apple: Last week Apple unveiled its new lower-end iPhone 16e model with a starting price of $599. The new phone will be the first for Apple to run on its in-house proprietary chip that replaces key components from Qualcomm. The phone will also run Apple’s AI software, Apple Intelligence.

• Nike: Nike said it is launching a new collection in collaboration with Kim Kardashian’s SKIMS brand that will offer a “best-in-class innovation in service of all women athletes” in effort to steal market share in the athleisure segment. The new line will offer training apparel, footwear, and accessories for women and is expected to debut this spring in the U.S. with a global expansion in 2026. 

• UnitedHealth: Shares of UnitedHealth fell over 10% Friday after the Department of Justice said it is launching an investigation into the company’s business practices, first reported by the WSJ. The report said the investigation relates to how the company adds questionable diagnoses to its member’s medical records to benefit from extra payments to its Medicare Advantage plans.

• Alphabet (Google): Bloomberg reported YouTube is planning to introduce a new “premium lite” paid video service that will come at a lower price that targets viewers that want to primarily watch videos other than music videos.

• Celsius: Energy drink maker Celsius shares were up over 30% Friday after it reported earnings that beat expectations with a solid outlook, and said it has agreed to acquire competitor Alani Nu for $1.8 billion.

• OpenAI: OpenAI said its chatbot ChatGPT had 400 million weekly active users as of February, a 33% increase from the 300 million weekly active users as of December. In addition, it has over 2 million paying business users, an increase from 1 million as of September, with Uber, Morgan Stanley, and T-Mobile as some of its largest enterprise customers.

Other News:

• Budget Resolution: Senate Republicans adopted a budget resolution late last week after working all night and 25 rounds of voting, with Republican Senator Rand Paul the only to vote against. The package includes funds for border security, defense, energy, which Trump called “one big beautiful bill.” The other challenge is finding common ground with the House, who has been going in its own direction and working on a separate package. For a more in depth review of where the House and Senate stand on the reconciliation process, read this update from Raymond James Washington Analyst Ed Mills.

• Defense Spending Cuts to Come: Certain stocks tied to defense spending pulled back last week after the Washington Post reported the Defense Secretary is aiming to cut the defense budget by 8% over each of the next 5 years, citing a memo it obtained. The proposed cuts are required to be made by February 24. There are 17 categories, like U.S. border security and nuclear weapon arsenal, that are to be exempt from the cuts.

• Health Secretary First Moves: Health Secretary RFK said in his first address to his staff that he plans to investigate topics that were “formerly taboo or insufficiently scrutinized” adding that nothing will be off limits, and everything will be subject to the “scrutiny of unbiased science,” saying his goal is to create transparency. He also said he might make adjustments to the FDA, the agency that gives approval to new drugs.

• IRS Cuts: The New York Times, citing an internal memo sent to IRS employees, said the IRS is going to lay off about 6,000 employees on Thursday and will focus on recent hires, driven by an executive order that directed the agency to terminate employees who were not viewed as critical to filing season. The report adds IRS managers have been telling its workers to come into the office with their government-issued equipment. The cuts would account for about 6% of the IRS staff.

• More Tariffs:
  • President Trump said he would propose tariffs on autos in the neighborhood of 25% but does not anticipate those to be effective until April 2.  He also said he is considering tariffs on pharmaceuticals and semiconductors. He added these tariffs will be “25% and higher, and it’ll go very substantially higher over a course of a year.” The delay in implementing the tariffs will give companies “time to come in” he said.
  • Trump said he is considering imposing 25% tariffs on all lumber imports.

• Deregulation Push: Trump signed an executive order requiring review of all government regulations.

• DOGE Dividend: Trump said his administration is considering returning 20% of the savings identified by the Department of Government Efficiency (DOGE), returning it to 79 million American households and using another 20% of the savings to pay down the Federal debt. The idea came from businessman James Fishback who proposed in a four page memo the government issue a “DOGE dividend.”

• China: China President Xi pledged in a private meeting with Chinese business leaders to support the private sector and urged them to demonstrate their talent and confidence in effort to boost sentiment in the nation.

• OPEC: Bloomberg reported OPEC is weighing another delay to its plan to increase oil production, which were set to resume in April. The delay would be the fourth consecutive time the group has delayed the planned increase since 2022. The group said the oil market Is too fragile to resume its planned increase.

WFG News

Tax Documents

Please see this release to understand the timing on when to expect tax documents.