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February’s cool CPI figures were a welcome step down from January’s hot readings. Positive market reaction to the news was spotty. Trends that would suggest a cold economy and hot inflation are still in the early stages but uncertainty remains high.

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The median normalized P/E ratio for the S&P SmallCap 600 fell to 21.0x in February, the bottom quintile of all monthly observations since 1994. Historically, a normalized P/E multiple near the current level has been associated with a five-year-forward annualized return for small caps in the double digits.

For months, the euphemism to describe the weakening labor market has been “normalization.” Our preferred terminology has been “pre-recessionary,” and the numbers continue to trend in that direction.

Flip-flopping about tariffs has damaged confidence and at a time when the economic expansion already looks fragile. Back in 2017 and 2018, Trump Tariffs 1.0 occurred with an economy much better positioned to absorb the tariffs themselves, as well as the confusion surrounding them.

Despite volatile headlines, the German DAX index has staged a stellar double-digit rally since the start of the year—outpacing even the most “exceptional” S&P 500. In fact, over the last year or so, the DAX has now pulled ahead of the S&P 500.

The index’s income statement turned in one of its best showings of recent years. Year-over-year sales growth for S&P 500 companies landed at 5.6%, exceeding the 5.0% rate in nominal GDP and mimicking the sales growth posted earlier in the year. 

It was 25 years ago this month when the legendary dot-com mania reached its crescendo, entering market lore as one of the greatest bubbles in history. This silver anniversary prompted us to create a month-long series of articles under the banner of “Manias, Bubbles, Panics, And Crashes.” Here we look back at the sheer scale and intensity of the internet craze.

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The S&P 500’s bottom-up operating EPS continued to improve in the second month of reporting. Since the start of Q4 announcements, the EPS figure has increased 1%. The direction of the estimate, not necessary the amount, is what’s impressive. The same can’t be said for the coming two quarters, however. Bottom-up projections for Q1-25 have fallen 4% in the last two months, while Q2-25 is off 2%. Again, sharp moves higher in the EPS snail trails are exceedingly rare. With almost all of the reporting done for 2024, the S&P 500’s operating EPS of $234 equates to a healthy YOY gain of 9.5%. The expectation for full-year 2025 currently stands at +14.3%.

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Defined Outcome and Derivative Income ETFs each offer attractive features in the form of modified payout or income characteristics. However, these benefits come at a cost of limited upside, and a “buyer beware” approach should be taken to weighing their pros and cons. Sustained bull markets reveal the true impact of trading potential upside for considerable benefits in the here and now. This study attempts to quantify the opportunity costs of capped funds using 2023-24 as a particularly harsh test case.

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The latest CPI report came in a tad hotter than consensus. Policies are likely the key driver of economic outcomes, including inflation, and we should get ready for more volatility going forward.

We believe stock market leadership will transition from Growth to Value in 2025. The P/E premium commanded by Growth stocks relative to Value is high, although not (yet?) quite as extreme as at the Y2K Technology bubble peak.

When the S&P 500 made all-time highs the week of Thanksgiving and the following week, we viewed it as “risky, but not toppy.” Today, it is every bit as risky, but now looks toppy, too. There’s enough “wrong” with the picture that if the market immediately began to fall apart, the technical crowd would be able to cry, “It was obvious!”

Broad investor interest has validated the attractiveness of buffer and covered call funds. An important part of understanding these ETFs is having a solid grasp of the upside participation that is sold away. The last two years provided a perfect environment to empirically measure the give-up associated with selling calls.

There were two new group positions this month: Internet Services & Infrastructure and Hotels & Leisure. Trading Companies & Distributors was sold.

After an initial post-election surge, hopes of a small-cap Trump bump seem to be fading. Since election day through the end of January, the Equal Weighted S&P 500 (+1.9%) has essentially matched the S&P 600 (+2.1%).