Market Movers & Shakers

It has been a month since our last edition of Notes from the Trading Desk, in which we recapped the move higher across all major U.S. equity indices in January. February, however, proved to be quite the opposite for stocks, with each of the major indices posting monthly declines. The S&P 500 slid by 1.42%, while the Nasdaq fell 3.97% and the Russell 2000 shed 5.45%. Consumer Discretionary, Communication Services, and Information Technology were the biggest laggards as a majority of the Magnificent Seven posted monthly losses. Momentum trades reversed course sharply over the last two weeks, with shares of recent winners like Palantir and AppLovin down 31% and 36%, respectively, from their mid-February highs.

Despite the S&P 500 logging a fresh all-time high just 2 weeks ago, there has been a big jump in bearish sentiment among market participants. The latest AAII Sentiment Survey showed pessimism among individual investors about the short-term outlook for stocks surged above 60% last week — the highest reading since September 2022. According to Bespoke Investment Group, there have only been six other weeks when bearish sentiment was higher in the history of the survey (since 1987). These occurred during the 1990 recession and Iraq’s invasion of Kuwait, late in the Great Financial Crisis and in September 2022 just before the market lows. The S&P 500 was off by an average of 27% from 52-week highs at the time of those readings, very firmly in bear markets. However, in this instance, the index is just 4% off highs. Treasury yields moved lower across the curve in February amid U.S. growth concerns. The 10-Year U.S. Treasury yield closed out the month at 4.19%, down nearly 50 basis points in two weeks from its intra-month high yield of 4.66%. The VIX briefly rose above 22 and the volatility curve went into backwardation at the depths of the recent “selloff” before settling just below 20 and moving back into contango as stocks clawed back losses on the final trading day of the month.



Source: LSEG Datastream and Yardeni Research

It should be noted that despite declines across the major indices and a large downward shift in investor sentiment, not all stocks suffered the same fate last month. Defensive areas of the market outperformed and logged positive returns in February. Consumer Staples, Real Estate, Utilities, and Health Care posted the largest gains among S&P sectors. On a factor level, low volatility outperformed, showcased by the Invesco S&P 500 Low Volatility ETF’s (SPLV) 4.60% advance in February, a stark contrast to the Invesco S&P 500 High Beta ETF’s (SPHB) nearly identical decline of 4.86%.



Source: FactSet

With the release of Nvidia’s quarterly earnings report last week and more than 97% of S&P 500 companies having reported results, Q4 2024 earnings season is essentially in the books. Earnings growth has been robust and exceeded lofty expectations. Earnings are set to grow 18.2% in Q4, well above the 5-year average of 10.4% and the 10-year average of 8.5%. In fact, 18.2% earnings growth marks the highest growth rate since Q4 2021. It also marks the sixth consecutive quarter of year-over-year earnings growth for the S&P 500. Ten of eleven sectors reported earnings growth in the fourth quarter. Financials reported the highest growth rate, with notable strength from banks and capital markets, while Energy was the sole sector reporting a year-over-year decline in earnings. Revenue growth was a bit cooler, though still came in slightly above estimates. Revenues are set to grow 5.3% year-over-year for Q4, marking 17 consecutive quarters of revenue growth for the S&P 500.

Nvidia’s earnings report was once again the most highly anticipated this quarter, as the AI-driven growth trend remains a key focus for market participants. The semiconductor giant’s fourth-quarter revenue and earnings per share came in ahead of estimates, however, the ~$1.2 billion revenue beat fell short of the whisper number on Wall Street for a $2 billion outperformance seen in recent quarters. Much of the scrutiny surrounded Nvidia’s gross margin outlook, which came in below analyst forecasts as the company ramps up production of its Blackwell GPUs. Elsewhere, recent reports from home improvement giants Home Depot and Lowe’s provided an update on the consumer and trends within the housing market. Both companies reported positive same-store sales growth for the first time in two years, suggesting the industry is making a gradual recovery as consumers readjust to higher mortgage rates. Lowe’s, in its forward guidance, which was a bit softer than anticipated, pointed to cautious consumers reluctant to spend on expensive discretionary projects. Home Depot echoed a similarly cautious outlook.



Source: The Conference Board; NBER

Softer economic data to start the year and heightened uncertainty surrounding tariffs has sparked some growth concerns for the U.S. economy. Consumer confidence fell sharply in February, registering the largest monthly decline since August 2021. According to The Conference Board’s survey, consumer confidence has declined for three consecutive months as views of the current labor market conditions have weakened and consumers are becoming increasingly pessimistic about future business conditions and future income. The survey also showed rising inflation expectations as consumers face surging prices of key household staples like eggs and fret about the potential impacts of tariffs. PCE data released last week showed a 0.2% decline in consumer spending in the month of January, the first decline since March 2023 and the biggest decrease in nearly four years. Data from the Labor Department released last week showed the number of Americans filing new applications for unemployment benefits rose by 22,000 to 242,000, the largest increase in five months. According to Paul Kiernan with the Wall Street Journal, claims in Washington, D.C. were roughly four times higher than at the same time last year, likely evidence of DOGE layoffs and belt-tightening by contractors. It is worth noting that unusual weather events like the snowstorms that blanketed large parts of the country and the wildfires in LA likely dragged on spending and may have been responsible for the larger than anticipated uptick in jobless claims. Recent economic reports have resulted in cuts to U.S. GDP forecasts. The Atlanta Fed GDPNow model turned negative last week, taking the Q1 forecast down from 2.3% growth into contractionary territory, first down to -1.5% before being revised lower to -2.8%. The model’s estimate for Q1 U.S. GDP growth was 3.9% growth at the beginning of February.

Updates & News*

Recent bouts of volatility have created opportunities to deploy cash on the transition front at a more accelerated pace relative to history. As a quick reminder, Tandem transitions new money over time on a stock-by-stock basis, paying prices our investment process dictates are reasonable to pay, rather than investing all at once. New accounts and recent deposits that have been under Tandem’s management for 2 weeks are just over a third of the way in line with our strategy, while those that have been here for a month are nearly 50% of the way transitioned. Going a bit further out, new accounts and additions that have been under Tandem’s management for three months are roughly 90% transitioned.

Shifting to portfolio news, a final wave of earnings reports rolled across the wires last month. Intercontinental Exchange (ICE), owner of the New York Stock Exchange, posted a Q4 earnings beat and announced a 6.7% increase to its quarterly dividend. The company also announced plans to launch NYSE Texas, a fully electronic equities exchange which will be based in Dallas. Expeditors International (EXPD) reported results that came in above analyst estimates on both the top and bottom lines. Expeditors’ management team cited strong demand for ocean transportation caused by disruptions in the Red Sea and an increase in demand coming out of Asia. Expeditors also recently announced the retirement of their CEO, Jeffrey Musser, who will be replaced by Daniel Wall, the current President of Global Geographies. Daniel Wall began working for Expeditors in 1987 as a messenger responsible for clients’ customs documents — a remarkable tenure and story! Tyler Technologies (TYL), a software and technology services provider for the public sector, reported results that exceeded expectations, driven by SaaS revenue growth of 23%, the company’s 16th consecutive quarter of SaaS revenue growth of 20% or more. Tyler Technologies CEO, Lynn Moore Jr., highlighted during the company’s earnings call the increased focus on government efficiency. He suggested that the newly established federal Department of Government Efficiency could ultimately present an opportunity rather than a risk, as Tyler’s technology plays a significant role in enhancing efficiency for its public sector clients. Elsewhere, Verisk Analytics, a data analytics and risk assessment partner to the global insurance industry, delivered Q4 sales and earnings results above consensus estimates and increased its quarterly dividend by 15.4%. And last but certainly not least, one of Tandem’s newest holdings, Genpact, beat Q4 sales and earnings forecasts, raised its guidance for 2025, increased its quarterly dividend by 11.5% and approved an additional $500 million increase to the company’s existing share buyback program.

Source: Source of all data is FactSet, unless otherwise noted.

*The transition level activity taken by Tandem is applicable to new accounts and new money, not the composite or firm-wide level. New accounts and new money are not automatically invested on the first day. Rather, they are transitioned into our strategy over a longer time period that is dependent upon market conditions. Strategy level activity is applicable to the composite and action is taken at the firm-wide level.

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Disclaimer: Tandem Investment Advisors, Inc. is an SEC registered investment advisor.

This audio/writing is for informational purposes only and shall not constitute or be considered financial, tax or investment advice, or an offer to sell, or a solicitation of an offer to buy any product, service, or security. Tandem Investment Advisors, Inc. does not represent that the securities, products, or services discussed in this writing are suitable for any particular investor. Indices are unmanaged and not available for direct investment. Please consult your financial advisor before making any investment decisions. Past performance is no guarantee of future results. All past portfolio purchases and sales are available upon request.

All performance figures, data points, charts and graphs contained in this report are derived from publicly available sources believed to be reliable. Tandem makes no representation as to the accuracy of these numbers, nor should they be construed as any representation of past or future performance.