As we move into late February, the picture for 2025 is beginning to get a little clearer.  Most analysts have their earnings estimate in, even before we get our final 2024 numbers in.  As you can see from the chart below (Global Earnings Estimates), the earnings growth for 2025 is estimated to be 14% for the S&P 500 (25% for the NASDAQ).  This is much better than the international markets.  Even though Internation is improving, we continue to slightly underweight it in our portfolios.

CHART 1

To take a deeper dive, the S&P 500 companies with positive 12-month changes in forward earnings have increased from 56% to 76%.  This should help broaden the market from just the Magnificent 7.  Since last July, the percentage of companies outperforming the S&P 500 year over year has increased from only 26% to 45%.  We now expect the S&P 500 earnings to be around $280 (up from $245 in 2024), and $310 plus in 2026.  Earnings are being boosted by productivity growth and expanding profit margins.  6700 – 6800 on the S&P 500 is an acceptable target range.

 

With all the good news on earnings, one would expect market sentiment to be exceptionally bullish.  In reality, it’s fairly bearish (See AAII chart below).

CHART 2

The most recent chart shows less than 30% of investors Bullish, with over 40% Bearish.  We watch these charts closely as they are great contrarian indicators.  It’s from the school of thought that says. “If you just bought, you should be bullish.  But if you bought, there are usually only two options left – hold or sell.”  Many long-term analysts have their own similar indicators, including Warren Buffet.  The above charts are scarily accurate as a contrarian indicator.  In late September of 2022 as the markets were bottoming out, the bullish indicator hit a 5 year low of under 18% Bullish, with over 60% Bearish.  At that time, the S&P 500 was 3600.  Today it’s over 6000.  You do the math!

 

Finally, I saw this chart recently (below) from WSJ recently and I thought I would share it.

CHART 3

So, just how big are the Magnificent 7 stocks?  As you can see by the chart above, they are individually larger than most European countries.  I believe Apple would be the 4th largest economy in the World by itself (as large as Germany and Spain combined)!  This is part of the reason we are underweighting international.

Going forward, we also see a stable bond market.  60/40 markets should do slightly above average.  But this “race” is a marathon.  We are not even to the first “water stand.”  There will be potholes, rainy weather, and maybe even a detour.  We will attempt to guide you and keep your shoes dry.  Enjoy the run!

- John Osborn

Past performance is not a guarantee of future results. Indices mentioned are unmanaged and cannot be invested into directly. Diversification and asset allocation strategies do not assure profit or protect against loss.  These are the opinions of John W. Osborn and not necessarily those of Cambridge. The views expressed herein are for informational/educational purposes only and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal.