Market Digest: PAYX, YUM

Argus

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Apr 03, 2025

Summary

First-Quarter Decline: Our Monthly Survey of the Economy, Interest Rates, and Stocks Leadership successful the U.S. banal marketplace flipped successful the archetypal quarter, with the 3 maturation sectors and the starring indices swinging to antagonistic for the twelvemonth to date. A assortment of factors contributed to this melodramatic shift. Sector rotation became meaningful successful 2024's 2nd fractional and has intensified successful 2025. After 2 years of AI euphoria, investors are taking profits successful AI names. The imminence of President Trump's 'Liberation Day' tariffs caused the marketplace to clang into the extremity of the archetypal quarter. The turbulence successful policies from the caller medication person contributed to marketplace uncertainty. Fear of tariffs, the volatile Ukraine situation, and DOGE occupation cuts are causing immoderate equity investors to determination to the sidelines and/or displacement into bonds. Rising safe-haven request for Treasuries is pushing down yields, raising the attractiveness of equity income sectors specified arsenic Real Estate and Utilities. Financial, Healthcare, Materials, Energy and Consumer Staples are each outperforming the semipermanent maturation leaders (Information Technology, Communication Services, and Consumer Discretionary). The GDPNow forecast for 1Q25 GDP has swung to antagonistic 1.8% arsenic of the extremity of March, this aft being affirmative astatine the extremity of January. Pre-buying up of imported goods up of tariffs and cautious user spending aft the vacation splurge caused the flip-flop successful GDP outlook. Argus expects a affirmative speechmaking connected 1Q25 GDP, but we person lowered our maturation estimation to 1.6% successful a dynamic environment. The Economy, Interest Rates, and Earnings Fourth-quarter GDP maturation declined from 3Q24 levels, but the U.S. system wrapped a coagulated 2024 twelvemonth with high-2% maturation for a 2nd consecutive year. The last (third) study of fourth-quarter GDP indicated maturation of 2.4%, up from 2.3% maturation estimated successful the preliminary (second) and the beforehand (first) reports, and a measurement down from 3.1% maturation successful 3Q24. Fourth-quarter 2024 GDP reflected ongoing maturation successful user expenditures and authorities spending, partially offset by a alteration successful investments. Imports, which are a subtraction successful the calculation of GDP, decreased 4th implicit quarter. The 0.1% nudge higher from the preliminary and beforehand reports chiefly reflected downward revision successful imports. Normally, fourth-quarter GDP would supply a model connected what to expect from the system successful the archetypal quarter. The policies of the 2nd Trump medication correspond a large alteration from those of the Biden administration, lessening the likelihood of wide continuity. Analysis of full-year 2024 whitethorn bespeak immoderate of the longer-term trends that could power the U.S. system successful the twelvemonth ahead. For each of 2024, U.S. GDP roseate by 2.8%, successful enactment with 2.9% maturation successful 2023 and 2.5% maturation successful 2022. On a dollar basis, GDP grew to $29.2 trillion from $28.3 trillion astatine the extremity of 2023. The user remains the biggest maturation driver. Personal depletion expenditures (PCE) for 2024 accrued 2.8%, up from 2.5% for each of 2023. Fourth-quarter PCE of 4.0% was the strongest successful immoderate 4th of 2024, driven by vacation spending. Full-year 2024 spending connected goods accrued 2.4% versus 1.9% successful 2023. Durable goods spending roseate 3.3% successful 2024, down from 3.9% for each of 2023. Non-durable goods spending roseate 1.9% for 2024, much than treble the 0.8% maturation successful non-durables spending successful 2023. Spending connected services was steady, with maturation of 2.9% successful 2024, matching 2023. Some of the maturation successful user services spending has been driven by rent equivalent, location and conveyance insurance, and different costs that consumers cannot control, and galore cannot avoid. Although services ostentation has been much stubborn than goods inflation, tariffs tin person an unpredictable interaction connected goods prices. Full-year 2024 user spending maturation reflects a sub-par archetypal quarter, rising spending successful the 2nd and 3rd quarters, and a beardown fourth-quarter finish. Consumers look to beryllium adapting to ostentation that is stuck conscionable supra the Fed's 2% target, resulting successful structurally higher prices. We person seen immoderate signs of consumers pulling backmost successful the archetypal fewer months of 2025 fixed tariff uncertainty. We expect PCE wrong the GDP accounts to proceed to nonstop conflicting signals successful 2025, portion remaining successful the 2%-3% scope arsenic the eventual tariff concern becomes settled and established. Non-residential fixed investment, the proxy for firm superior spending, roseate astatine a 3.6% yearly complaint successful 2024; this class grew astatine a 6.0% complaint successful 2023 and 7.0% successful 2022. PCE and non-residential fixed concern correspond astir four-fifths of gross home product. In 2024, user spending added 1.87 percent constituent to GDP, portion non-residential fixed concern added 0.49 percent point. Residential fixed concern swung to affirmative successful 2024, rising 4.2% arsenic double-digit maturation successful 1Q24 and astonishing 5.5% maturation successful 4Q24 bracketed antagonistic readings successful the mediate quarters. With the timing of immoderate further fed complaint cuts uncertain, and with owe rates inactive elevated compared to rates prevailing implicit the past decade, the lodging assemblage is much apt to retrieve successful fits and starts than to burst into steadfast growth. Long Treasury yields, aft going arsenic debased arsenic 4.18% astatine the opening of March, person crept backmost up to astir 4.37%. Long rates are good supra September 2024 lows successful the 3.6% range. Mortgage rates, and peculiarly 30-year fixed-rate mortgages, are tied to 10-year Treasury yields. Offsetting complaint unit is aggravated pent-up request for location ownership. Exports grew 3.3% successful 2024, and imports roseate 5.3%. Although the export-import equilibrium favored imports successful 2024, some categories were antagonistic successful 4Q24. We expect volatility successful this class to intensify 4th implicit 4th arsenic businesses effort to expect and get up of the administration's ever-changing tariff policies. Another volatile category, the alteration successful backstage inventories, added six ground points to 2024 GDP aft subtracting 41 ground points successful 2023 during the supply-chain crisis. Inventories person normalized, and disruptions to the proviso concatenation person chiefly receded. Another circular of supply-chain volatility, however, could ensue if recently enacted tariffs trigger a planetary commercialized war. Overall authorities spending was up 3.4% successful 2024 and added 58 ground points to 2024 GDP growth. Federal spending was up 2.6% past year, portion authorities and section authorities spending grew 3.9%. The terms scale for gross home purchases accrued 2.4% for each of 2024, compared with a revised summation of 2.9% successful 2023. And the PCE terms scale precocious 2.5%, down from 3.8% successful 2023. GDP maturation with little terms increases gives the Fed country to chopped rates going forward. With the archetypal 4th of 2025 complete, economists and strategists person chiefly January and February information to study, with a sprinkling of March information (mainly sentiment indicators). The economical representation is mixed, but showing signs of deterioration. Sentiment indicators crossed consumers and tiny businesses person mislaid immoderate optimism related to pending deregulation and are present weakening connected concerns that tariffs volition reignite ostentation and stunt growth. Sentiment among ample institution purchasing managers is much positive, but appears to beryllium wavering. The user system continues to nonstop mixed signals. Jobs and wages are inactive growing, albeit astatine a slower pace. The U.S. system generated 151,000 caller jobs successful February, beneath the statement telephone of 160,000. Three-month mean jobs maturation of 200,000 remained supra the full-year 2024 mean of 166,000; the 2023 mean summation was 251,000 caller jobs per month. Multiple indicators of the employment system - including the unemployment rate, wage growth, and the mean enactment week - remained steadfast successful the archetypal 4th of 2025. The unemployment complaint was 4.1% for February compared with 4.0% for January. Economists qualify the U.S. employment concern arsenic being successful a 'low-fire, low-hire' phase. Average hourly net grew 4.0% annually successful February compared with 4.1% successful January. Annual wage maturation continues to tally supra inflation, but the premium has narrowed. Industrial accumulation accrued 0.7% successful February from a downwardly revised 0.3% successful January. Between February 2024 and February 2025, wide concern accumulation accrued 1.4%. After a anemic 0.1% summation successful January, manufacturing accumulation roseate 0.9% successful February. Mining roseate 2.4%, portion formerly beardown utilities declined 2.5%. For each of 2024, concern accumulation accrued 0.5% and was besides led by utilities output. Manufacturing enactment successful 2024 was level with that successful 2023. Capacity utilization of 78.2 for February 2025 improved from 77.8% for January but remained 1.2 percent points beneath the long-run average. The NFIB's Small Business Optimism Index reached a six-year precocious of 105.1 successful December 2024 successful anticipation of a alteration to a much business-friendly administration. That optimism has been dented somewhat arsenic the scale fell to 102.8 successful January 2025 and further to 100.7 successful February. The Small Business Uncertainty Index roseate 4 points to 104, the second-highest speechmaking connected record. Small concern owners proceed to mention trouble successful uncovering and hiring skilled workers to capable unfastened positions; and less owners are readying superior investments successful the adjacent fewer months Consumers besides look to beryllium acrophobic that tariffs could origin an uptick successful inflation. The University of Michigan Consumer Sentiment Index for March 2025 fell to 57.9, good beneath the 63.2 statement estimation and down from 64.7 successful February. The survey was down 22 percent points from December 2024. All 5 scale components deteriorated, and year-ahead ostentation expectations jumped to 4.9% successful March from 4.3% successful February. As sentiment declines, assurance erodes arsenic well. The Conference Board's Consumer Confidence Index for March 2025 declined by 7.2 points to 92.9, its lowest level since January 2021. This scale has declined for 4 consecutive months. The expectations index, based connected consumers' short-term outlook for income, business, and labour marketplace conditions, dropped to 65.2. That is the lowest speechmaking successful this class successful 12 years and, according to the Conference Board is '...well beneath the threshold of 80 that usually signals a recession ahead.' The retail income study for February showed betterment from a dismal January, but continued to awesome weakness successful spending. Overall U.S. retail income for February roseate 0.2% period implicit month, missing the 0.7% statement forecast portion recovering from a revised 1.2% diminution for January. Retail income for February 2025 were up 3.1% from those successful February 2024, beneath the statement outlook for astir 3.5% yearly maturation successful spending. The Bureau of Economic Analysis wrong the Department of Commerce reported that idiosyncratic incomes roseate 0.8% successful February 2025, pursuing maturation of 0.9% successful January. Personal depletion expenditures (PCE) roseate 0.4% for the period aft falling 0.2% successful January. In the months earlier the Fed's archetypal complaint chopped of the rhythm successful September, optimism returned to the long-depressed lodging industry. Market involvement rates came down to multi-month lows pursuing the September complaint cut, spiked higher into 2024 year-end, and person since moved little connected safe-haven enslaved buying amid argumentation uncertainty. Current 30-year owe levels supra 6.5% volition not determination the needle overmuch fixed the ample fig of homes with nary owe oregon mortgages beneath 4%. Until rates determination a constituent oregon 2 lower, Argus is not looking for a meaningful betterment successful lodging activity. The Atlanta Fed's GDPNow exemplary had a whipsaw effect to first-quarter data. From a bold 3.9% maturation forecast for 1Q25 GDP, issued successful January, GDPNow arsenic of the extremity of March is forecasting a 1.8% diminution successful first-quarter GDP. The displacement successful outlook from affirmative to antagonistic reflects anemic PCE (consumer spending) trends and a surge successful imports arsenic companies pre-buy overseas goods successful anticipation of tariffs. Argus Chief Economist Chris Graja, CFA, is modeling GDP maturation of 2.0% for 2025, down from an earlier 2.3% forecast. Argus believes GDP maturation is apt to stay affirmative adjacent the low-2% level successful 2026. The Federal Reserve raised involvement rates much than 5 percent points betwixt March 2022 and July 2023. After holding rates dependable for 8 consecutive meetings, the Fed astatine its mid-September 2024 FOMC gathering chopped involvement rates by 50 ground points (bps). The Federal Open Market Committee (FOMC) past chopped the fed funds complaint by 25 bps each astatine its November and December FOMC meetings. The FOMC concluded its March 2025 gathering astatine mid-month and, arsenic expected, maintained its fed funds people astatine the 4.25%-4.50% level. This marked a 2nd consecutive gathering successful which the Fed stood pat, aft 100 bps of cuts successful autumn 2024. Argus believes this non-decision reflects the Fed's ongoing concerns with ostentation arsenic the cardinal slope monitors the wide economy. The Fed had been mostly sanguine astir the system successful the past 2 years, but present appears to beryllium acknowledging caller strains successful the outlook. The Fed's intimately studied post-meeting connection added connection that 'uncertainty astir the economical outlook has increased.' It besides deleted connection stating 'risks to achieving employment and ostentation goals are astir successful balance.' The March 2025 FOMC gathering included merchandise of the Fed's alleged 'dot plot,' which signals its intentions for interest-rate argumentation successful the intermediate term. The newest dot crippled signals 2 complaint cuts successful 2025 and 2 successful 2026. But FOMC voting members were not unanimous successful their predictions. In a displacement seen arsenic 'hawkish,' 4 members voted for conscionable 1 chopped successful 2025 portion 4 voted for nary cuts. The Fed besides slowed the gait of quantitative tightening, reducing the magnitude of Treasury securities it volition let to tally disconnected each period from $25 cardinal to $5 billion. Quantitative tightening has removed $2.2 trillion from the Fed's equilibrium expanse since mid-2022. The cardinal slope dialed down its GDP maturation forecast for 2025 to 1.7%, from 2.1% issued successful December 2024. The Fed raised its unemployment complaint forecast to 4.4% exiting 2025 from a 4.3% prediction 3 months ago. And it present looks for halfway PCE ostentation astatine the extremity of 2025 to beryllium 2.8%, raised from a 2.5% forecast. These less-favorable forecasts are accordant with slowing growth, but not recession. Where the Fed goes from present whitethorn necessitate further advancement connected inflation, which is stubbornly stalled a half-point to a constituent supra the Fed's 2% people range. The Fed is cognizant that tariffs are historically associated with higher goods price. Were ostentation to emergence from existent levels, we judge this Fed would not hesitate to instrumentality to neutral oregon adjacent to restrictive monetary policy, i.e., commencement raising rates again. The Consumer Price Index roseate 0.2% successful February 2025, considerably cooler than the 0.5% leap successful January. The scale for structure roseate 0.3% monthly and accounted for astir fractional the monthly summation successful inflation. All-items CPI was up 2.8% from February 2024. Core CPI was up 0.2% period implicit period and 3.1% from February 2024. The Fed's preferred ostentation gauge, the Core PCE Price Index, roseate 0.4% successful February, moving the incorrect mode aft rising 0.3% successful January and 0.2% successful December. This metric was up 2.8% connected a year-over-year ground successful February, up from 2.6% twelvemonth implicit twelvemonth successful January. The yearly alteration has moved small from 2.7% successful July 2024. Bond yields deed multi-month lows pursuing the Fed's September 2024 complaint cut, moved higher connected ostentation concerns mixed with economical optimism pursuing the election, and person travel down crossed 2025 arsenic ostentation fears thrust safe-haven investing. Both middle-maturity and long-maturity yields are astatine oregon adjacent 2025 lows. The 10-year Treasury output was 4.27% arsenic of the extremity of March 2025, compared with 4.23% arsenic of the extremity of February. The agelong output reached a debased of 3.75% arsenic of September 2024, portion the rhythm highest for the 10-year output was astir 4.9% successful October 2023. The two-year Treasury output was 3.89% arsenic of the extremity of March 2025, versus 3.99% arsenic of the extremity of January. The two-year output reached a rhythm debased of 3.55% successful September 2024; the highest level was 5.2% arsenic of October 2023. Notwithstanding existent sound successful the market, Argus expects short-term yields to determination little from existent levels. Long yields implicit clip are expected to widen their comparative premium to abbreviated yields. We apt person seen the extremity to twos-10s inversion successful this cycle, though the three-month output was supra the agelong output astatine extremity of March. With the Fed is successful 'no hurry' to chopped involvement rates further, Argus Fixed Income Strategist Kevin Heal is modeling 2 quarter-point cuts successful 2025. Two cuts successful 2025 would bring the cardinal inclination successful fed funds to 3.75%-4.0% by December 2025. Argus besides acknowledges the anticipation that the Fed holds rates unchanged successful 2025, arsenic it continues to show the economy, employment, and inflation. Calendar fourth-quarter 2024 net from continuing operations roseate successful mid-teen percentages from 4Q23, marking the strongest maturation since 4Q22. Of the companies reporting affirmative maturation twelvemonth implicit year, much than 75% reported net up of statement expectations. The mean net 'surprise' for these companies is astir 7%. By comparison, the mean EPS bushed against quarterly expectations has been successful the 8%-9% scope implicit the past 5 years and successful the 6%-7% scope implicit the past 10 years. The champion EPS maturation sectors for 4Q24 were Financial and Communication Services. All sectors posted affirmative net maturation with the objection of Energy, which experienced a 30% EPS decline. Notably, the nett net borderline climbed to 12.6% for 4Q24 from 12.2% for 3Q24, portion remaining comfortably supra the multi-year mean successful the 11%-12% range. For 2025, our forecast for S&P 500 net from continuing operations is $276, implying full-year EPS maturation of 12%. For each of 2025 astatine the assemblage level, cardinal maturation drivers are apt to see accelerating maturation successful healthcare earnings; and improved show from the 3 sectors (Energy, Materials, and Industrials) that dragged connected 2024 earnings. Energy could make affirmative comparisons opening successful 2Q25, but whitethorn person to hold for 2H25, depending connected merchandise pricing. A instrumentality to sustained maturation momentum for the commodity-sensitive Energy and Materials sectors is babelike connected minimal disruption from caller tariffs and occurrence of the Chinese government's stimulus program. Other sectors are forecast to clasp their existent beardown maturation rates for the adjacent twelvemonth oregon more. Information Technology is forecast to prolong double-digit EPS maturation successful the mid- to high-teen percentages done 2026. Utilities maturation is forecast to mean lone somewhat portion remaining supra semipermanent average, aided by AI information halfway request for electricity. Other sectors forecast to turn EPS supra their semipermanent averages see Financial, Healthcare, Consumer Discretionary, and Consumer Staples. For 2026, our S&P 500 net estimation is $307, which assumes EPS maturation of 11%. For 2026, we look for a continuation of the above-average maturation assumptions successful our 2025 forecast, portion moderating the wide maturation outlook slightly. We expect the AI translation to proceed to thrust maturation successful Communication Services, Information Technology, and Consumer Discretionary, meaning those sectors could resume enactment adjacent year. We look for maturation to dilatory successful antiaircraft sectors but perchance to prime up successful Energy. Domestic and Global Markets In the last 2 months of 2024, the banal marketplace rallied successful November connected the predetermination result and fell successful December owed to the more-cautious Fed tone. Underneath the surface, the ongoing rotation distant from maturation and AI and toward everything other continued astatine the scale level. Three months into 2025, marketplace enactment has been flipped connected its head. At the extremity of March 2025, the Dow Jones Industrial Average led among the 3 large indices, with a 1.9% year-to-date decline. The S&P 500 was down 4.8%, portion the Nasdaq was down 10.1% and afloat successful correction territory. In a motion of the implicit reversal astatine the benignant level, Wilshire Large Cap Growth is down 7.7% arsenic of March-end, versus a affirmative 1.6% for Wilshire Large Cap Value. The Russell 2000 is down 9.0% twelvemonth to date, adjacent though these smaller, domestic-facing companies are expected to beryllium little impacted by tariffs. The Barclays Bloomberg U.S. Bond Index, which finished 2024 with a 0.9% gain, was up 1.9% twelvemonth to day arsenic of the extremity of the archetypal quarter. Bond returns bounced astir each done 2024, and determination is nary crushed to presume they volition beryllium unchangeable successful 2025. Whereas the past 3 years were dominated by monetary policy, fiscal argumentation could person an outsized interaction successful 2025. Consistent with the scale show during the archetypal 4th of 2025 favoring bluish chips (DJIA) implicit high-beta maturation (Nasdaq), the accepted maturation secto