Wealth Insights

Stocks Commentary

Stocks: January’s Gains Bode Well For U.S. Stocks In ’25, But Near-Term Hurdles Remain

February 2025

Headline risk reared its ugly head as February began, with the U.S. announcing intentions to levy 25% tariffs on certain goods imported from Canada and Mexico, and an additional 10% tariff on imports from China. After some contentious conversations with Canada and Mexico, the U.S. delayed tariffs on goods imported from both countries for “at least 30 days,” while moving forward with the up-sized tariffs on Chinese goods. China announced retaliatory tariffs of 15% on select imported goods from the U.S., but the limited scope and magnitude appeared to be little more than a face-saving move which many observers viewed as an attempt to de-escalate the situation. Investor sentiment and risk appetite could remain on shaky ground over the near-term as market participants grapple with uncertainty tied to trade, immigration, and taxes, along with the outlook for fiscal policy, with movement on any of these fronts potentially unsettling for investors in stocks and other riskier asset classes.

January proved profitable for investors in U.S. stocks as the S&P 500 turned out a 2.7% gain, while the S&P Midcap 400 and Small Cap 600 indices did even better, rallying 3.8% and 2.9%, respectively. Yale Hirsch, creator of the Stock Trader’s Almanac, devised the “January Barometer” in 1972, making note of the propensity for the S&P 500’s performance in January to set the tone for the year ahead. Gains in January have often implied a positive year ahead for the index, while a negative month has typically translated into a down year for the S&P 500, with the January Barometer proving to be reliable in almost 84% of calendar years dating back to 1950. By this measure, 2025 is poised to be another positive year for large-cap U.S. stocks, but policy-related hurdles and headwinds lie ahead and could limit near-term upside. February has a reputation for being a challenging month for stocks; since 1928, it is one of only three calendar months in which the S&P 500 has, on average, generated a negative return. With this backdrop in place, we wouldn’t be surprised to see volatility remain elevated and stocks struggle for direction over the coming month, particularly after such a strong start to the year.

Upside could be limited on a tactical basis as the calendar turns unkind this month and policy uncertainty weighs on investor sentiment and risk appetite, but over the balance of 2025 we remain cautiously constructive on U.S. large-cap stocks. During January’s rally, capital rotated both within the ‘Magnificent 7’ and between sectors into names with more reasonable valuations and less lofty expectations, which leaves us encouraged that investors aren’t looking to exit stocks en masse but are continuing to “skate to where the puck is going,” not where it has been in recent years. Within the S&P 500, information technology was the only sector to close the month in negative territory, evidence of broader participation, which increases our confidence that the index can digest gains from ’23 and ’24 over time as opposed to requiring a meaningful price decline to build up buying interest and the necessary energy to make its next leg higher.

Uptick In IPO Activity A Double-Edged Sword For Small-Caps. The market’s pulse outside of the usual mega cap suspects was encouraging in January, as the S&P Small Cap 600 and S&P Mid Cap 400 both outpaced the S&P 500 during the month. Mid-caps and small-cap growth were specific standouts from a style perspective, rising 3.8% and 3.9%, respectively, while large-growth produced a more modest 1.9% return as less exposure to information technology stocks proved additive to relative returns. Macro tailwinds for small and mid-cap stocks included yields on the 2-year U.S. Treasury falling 18-bps from the high-water mark mid-month, and the belief that tariffs could impact global oriented companies in an outsized way played a role as well. On the margin, small caps derive less revenue from abroad as the small-cap Russell 2000 garners 21% of sales from outside the U.S., while the S&P 500 is closer to 30% and the Magnificent 7 is closer to 49%. However, smaller companies still import intermediate goods from abroad and tend to be price takers, leaving these companies susceptible to earnings shortfalls should tariffs be levied in a broader manner. Our view that IPO activity should ramp up in the coming year(s) as deregulation and pro-business policies take root could be a double-edged sword for small caps, specifically.

Heavier equity issuance tends to coincide with healthy investor risk appetite, which provides a tailwind for smaller capitalization stocks, but flows into IPO’s can come at the expense of small caps which are viewed as higher beta and riskier exposures akin to the risks investors take when allocating capital to newly public companies. In 2022-’23, we saw the lowest IPO volume since 2008-’09, which implies pent-up demand for companies to tap the public markets for capital, in our view. We expect private equity sponsors to be more active in the coming quarters as they view this as a more opportune time to exit portfolio companies to realize value for investors. An uptick in IPO transactions could contribute to volatility in small caps in the coming quarters, but could potentially be offset by a more active environment for mergers and acquisitions (M&A), which leaves us neutral on SMid at present.

Eurozone, U.K. Stocks Potentially Well Positioned As Global Growth Concerns Build With Trade In Focus. Indices tracking Eurozone and United Kingdom stocks have had a surprisingly strong start to the year, evidenced by the MSCI Eurozone and MSCI U.K. rallying 7.1% and 5.5%, respectively in January. While little has changed regarding our economic outlook for the Eurozone at large or the U.K., as we still see paltry economic growth in the coming year, that is a widely held view and market participants have seen little reason to allocate to Europe as a result, which may have contributed to January’s gains as offsides investors were forced to chase these stocks higher. Interestingly, rock-bottom growth expectations could leave Eurozone and U.K. stocks somewhat insulated from trade/tariff-related volatility, and with valuations somewhere between reasonable and cheap, these two factors may be driving the year-to-date outperformance of these stocks.

The U.S. has focused its trade-related grievances on Canada, China, and Mexico up to this point and has only mentioned the prospect of tariffs on goods imported from the EU and U.K. in passing. Canada, China, and Mexico combined account for approximately 40% of U.S. imports, while the Eurozone and U.K. make up a much smaller percentage, and it’s worth noting that the U.S. runs a trade surplus with the U.K., so tariffs wouldn’t likely move the revenue needle much but could still be used as leverage to lower tariffs on U.S. exports to Europe. Lastly, both the British pound and euro have fallen by around 7% relative to the U.S. dollar since the end of September which helps offset rising prices stemming from tariffs.

Emerging Market Stocks The Canary In The Coal Mine To Gauge How Tariff Talks Are Going. The U.S. Dollar Index (DXY) rallied sharply last month reaching 109.95 as tariffs on Canada, China, and Mexico were bandied about, but sold off and ended the month modestly lower after the U.S. gave Canada and Mexico 30-day reprieves. Dollar weakness would provide a boost for foreign sales generated by U.S. large-cap stocks (S&P 500), particularly mega-cap technology stocks, but developing markets abroad would likely be bigger beneficiaries. Additional U.S. tariffs on goods imported from China seemed to get lost as tariff/trade rhetoric put Canada and Mexico front and center, but China responded to the announcement that the U.S. would levy a blanketed 10% tariff on goods the country exports to the U.S. by announcing 15% tariffs on a select (small) number of mostly inconsequential U.S. exports. Market participants viewed China’s response as evidence that the country seeks to avoid escalation and a tit-for-tat trade war, an approach that investors in both U.S. and Chinese stocks cheered with the MSCI China index turning out a 3.3% monthly gain. A solid start to the year for Chinese equities wasn’t the only bright spot in emerging markets as the MSCI Brazil index gained 12.5% as Latin America rebounded from deeply oversold positions late last year. Currency volatility clouds the outlook for emerging markets, but the above average free cash flow growth and cheap valuations suggest developing EM equities could capitalize if trade headwinds abate and the U.S. dollar weakens.