Highlights for This Week Include:

• While consumer spending fell in January, unusually cold weather and LA wildfires played a role. Meanwhile, income surged in January. While uncertainty centered on government spending cuts and tariff impacts remains high, consumers are well positioned for future spending.
• The February business surveys and Beige Book remain consistent with further economic growth, despite the headwinds presented by potential tariffs and government spending cuts.
• Once again, we saw better-than-expected profits in the fourth quarter, led by Financials and Technology-related firms. Profit estimates for 2025 are also holding up well and are expected to show 10% growth.
• Major market averages remain in pull-back mode, reflecting softer-than-expected economic readings and uncertainty around government policy. Pullbacks and consolidations are common occurrences, and while focused on heightened uncertainty, we are maintaining a positive outlook on the economy and stocks.

Consumer Spending Underwhelms While Income Surges in January

Consumer spending fell more than expected in January, down 0.2% m/m after December’s healthy gain of 0.5% m/m. Some pullback in spending is not surprising after the fourth quarter saw solid spending growth of 4.2% y/y, especially given unusually cold weather and LA wildfires in January.

Importantly, income growth remains healthy, with income gains accelerating a more-than-expected 0.9% m/m (4.6% y/y) in January. While cost-of-living adjustments to social security benefits played a role, wage and salary income (0.4% m/m) continue to anchor gains that are now significantly outpacing inflation (0.2% m/m), which implies substantial gains in purchasing power. While uncertainty centered on government spending cuts and tariff impacts remains high, consumers remain well-positioned for future spending.

Business Surveys Remain Consistent with Further Economic Growth

The February ISM Services PMI (a business survey of the private sector service economy) came in at a better-than-expected 53.5% (above 50% represents an expanding service sector). The February reading of 53.5% not only exceeds the January reading of 52.8% but is also a full percentage point above the average PMI reading of 52.5% for the last 12 months.

February was the third month in a row with all four subindexes that directly factor into the Services PMI — Business Activity, New Orders, Employment, and Supplier Deliveries — in expansion territory, the first time this has happened since May 2022. However, government policy anxiety continues over the potential impact of tariffs and some respondents indicated that federal spending cuts are having a negative impact on their business forecasts.

The February ISM Manufacturing PMI came in at a lower-than-expected 50.3%. While this is consistent with manufacturing expanding marginally for the second month in a row, the details of the report were weak, led by falling new orders. Manufacturing has been stabilizing after several years of weakness and government policy uncertainty is now presenting a headwind with many survey respondents expressing tariff concerns.

Beige Book Consistent with Further Economic Growth

The February edition of the Federal Reserve’s Beige Book, a summary of current economic conditions across the 12 Federal Reserve Districts, showed overall economic activity rose slightly since mid-January. Six Districts reported no change, four reported modest or moderate growth, and two noted slight contractions. While tariffs are a concern, overall expectations for economic activity over the coming months were slightly optimistic.

Another Positive Earnings Season

We have essentially completed the fourth quarter earnings season with results showing revenue growth of 5.1% and earnings of 14.2%. Earnings were led by Financials (+34%, which face easy comparisons to last year) and Technology (+28%). For the full year 2024, earnings grew by a better-than-expected 10.0%.

2024 earnings were consistent with the past few years, where healthy economic growth led to better-than-expected profit growth from companies that typically provide a conservative outlook for their profit growth.

For 2025, earnings are expected to grow by 10%, led by Technology (+19%), Health Care (+17%), and Communications (+10%). Energy (+0%) and the defensive Consumer Staples (+1%) are expected to see the slowest growth.

Stock Market Dynamics Remain Healthy

The major market averages (S&P 500, Dow Industrials, and Nasdaq) have pulled back from all-time highs while Technology sector leadership is waning. This reflects recent soft economic readings, including consumer spending, and uncertainty surrounding government policy (tariffs and cost cuts) reflected in business and consumer surveys.

We note pullbacks and consolidations are common, even during bull markets, and we continue to see favorable long-term market dynamics. With most fourth-quarter earnings reports in, corporate profits continue to come in better than expected, which provides the foundational support for stocks. Earnings estimates for 2025 are also holding up well.

Given the positive economic growth that we continue to see and the fact that corporate profits and future estimates remain sturdy, we remain positive on the economy and stocks while focused on current uncertainty.