Stocks May Have Rebounded But Headwinds Remain Ahead

Market Wrap

Overall, Mag 7 and technology were investors’ friends yesterday as the Nasdaq Composite rose 1.22%. Despite an S&P 500 index advance/decline line that still ran in favor of “Declines” (181/322), yesterday saw that index post modest gains of 0.49%. Aside from Apple (AAPL), Mag 7 names figured prominently in the top 10 contributors to return for the index, with Nvidia (NVDA) alone accounting for just under 70% of the day’s results. The Dow had another down day, shedding 0.20%, and small caps, while not explicitly tied to Mag 7 & technology did advance 0.14%. It’s not lost on us that markets have been dropping in 2-4% intervals and clawing back 1-2% at a time but until the macro environment starts to stabilize, and recession/stagflation fears start to settle down, this seems to be the current status quo.

Sectors also saw a similar advance/decline profile as our last update with the exception being that it was 75% of index weight posting gains this time led by Mag 7 laden Technology, Consumer Discretionary, and Consumer Services groups.

Despite dropping 10% yesterday, volatility remains high as the Cboe Market Volatility Index (VIX) closed at 24.23. Despite equity volatility moderating modestly, gold remains elevated at $2,933.80/oz and the 10-year treasury saw its yield tick higher to 4.31%.

The Tematica Select Model Suite shared in yesterday’s rally, led by Digital Infrastructure, Artificial Intelligence, and despite a recent push by the White House to reverse congressional approval, CHIPs Act. A 14.51% rebound in Intuitive Machines (LUNR) helped not only that name but Space Economy as well.

Stocks May Have Rebounded But Headwinds Remain Ahead

While indicating a mixed stock market open later this morning, equity futures are well off their early morning lows. We’ll want to see how those futures react to this morning’s February Producer Price Index (PPI) report, which is expected to follow the February Consumer Price Index (CPI) report and show a downtick in inflation pressures. What stood out to us in yesterday’s CPI report was the drop in airline ticket prices as that followed Delta Air Lines (DAL), American Airlines (AAL), and Southwest Airlines (LUV) recent sales and profit forecast cuts for the current quarter. In a filing with the SEC, American shared that part of its revised outlook reflects “softness in the domestic leisure market, primarily in March…”

Note the timing, that’s after the February drop in airline ticket prices found in the latest CPI report. That builds on the expanding list of retailers that have cited weaker consumer spending prospects as they issued weaker guidance that fell short of Wall Street expectations. Hammering that home, yesterday Colgate Palmolive (CL) shared it is seeing some hesitancy in the consumer and some destocking across various channels.

Shortly thereafter, American Eagle (AEO) issued downside guidance for the current quarter, with comp sales expected to fall mid-single digits, calling out the quarter is off to a slower start than expected. Moreover “ongoing consumer uncertainty and changes in the operating landscape, including tariffs and strength in U.S. dollar, are also creating factors for us to navigate.” That led American Eagle to guide fiscal year revenue and profits down on a year-over-year basis.

It indeed takes more than one company to make a trend, but when we string together comments and disappointing outlooks from Colgate Palmolive, American Eagle, Macy’s (M), Kohl’s (KSS), Abercrombie & Fitch (ANF), Target(TGT), and Walmart (WMT), it’s time to question the outlook for a key part of the US economy – consumer spending. Recent data has shown rising inflation expectations among consumers, which raises renewed questions about spending power. Pairing that with record consumer debt levels, the explosion in February layoffs captured in the latest data in the Challenger Job Cuts report, and overall uncertainty emanating from Washington, makes for a strong tailwind for the Cash-Strapped Consumer.

There are also reasons to question near-term business investment prospects. Tariff uncertainty for one, and the Atlanta Fed’s GDPNow model for the current quarter slipping into negative territory for another. Those help explain why the Uncertainty Index found in the NFIB’s latest Small Business Optimism Index rose to its second-highest recorded level. As we’ve seen before, during periods of high uncertainty businesses, generally speaking, tend to pull back on hiring, spending, and investments. That’s another likely near-term headwind for the economy.

As we look ahead, expected Trump reciprocal tariffs targeted for April 2 as well as tariff countermeasures from China, Canada and now the European Union in addition to those items laid out above, are leading us to question S&P 500 consensus EPS growth expectations for Q2 2025. The current consensus tallied by FactSet calls for those earnings to grow 9.2% compared to those for the Q1 2025 quarter. That’s a quicker pace than the 7.2% gain posted in the Q2 2024 quarter compared to Q1 2024 when the economy faced far fewer headwinds and uncertainties.

The likely scenario as it stands today is companies will issue more conservative guidance for Q2 2025 than the market expects. Should that play out, it would likely raise questions for the arguably even more aggressive ramp in EPS growth projected for 2H 2025 (+13.8% compared to 1H 2025 vs. the 9.9% achieved in 2H 2024 compared to 1H 2024. Granted some of that forecasted 2H 2025 EPS acceleration may be tied to Trump tax cut hopium, but reality is pointing to progress on that front being a late Q2 2025 event. Given the timing, it doesn’t seem like many companies will be able to bake that expectation into their June quarter guidance.

Putting it all together, while the stock market rallied off from oversold levels yesterday, there are still multiple headwinds that could restrain its performance in the coming weeks and months. More chop that sustained upward movement could be what we see as the market contends with technical resistance ahead. For the S&P 500 that clocks in first at 5,737.35(the 200-day moving average) with much heftier resistance, as we can see in the above chart above, near 5,947-5,957.

The smart play would be to follow where spending, be it enterprise, consumer, or other, is still happening if not ramping. To us that keeps us bullish on our Artificial Intelligence, Cash-Strapped Consumer, Cybersecurity, Digital Infrastructure, Nuclear Energy & Uranium, and Safety & Security targeted exposure models and strategies. And yes, given our comments above and what is likely ahead, it stands to reason some exposure to our Market Hedge model is warranted.

We’d also suggest you read this weekend’s Thematic Signals, where we will share multiple ripped-from-the-headlines confirmation points for those strategies and others.

The Strategies Behind Our Thematic Models

• Aging of the Population – Capturing the demographic wave of the aging population and the changing demands it brings with it.
• Artificial Intelligence – Software, chips, and related companies that facilitate the collection and analysis of large data sets and autonomous generation of solutions given non-machine language prompts.
• Cash Strapped Consumers – Companies poised to benefit as consumers stretch the disposable spending dollars they do have.
• CHIPs Act – Capturing the reshoring of the US semiconductor industry and the $52.7 billion poised to be spent on semiconductor manufacturing.
• Cloud Computing – Companies that provide hardware and services that enhance the cloud computing experience for users, such as co-location, security, and edge computing.
• Core Holdings – Companies that reflect economic activity and are large enough to not get pushed around by day-to-day market trends. Low-beta, large-cap names able to better withstand economic turmoil.
• Cybersecurity – Companies that focus on protecting against the penetration of digital networks and the theft, ransom, corruption, or destruction of data.
• Data Privacy & Digital Identity – Companies providing the tools and services that verify authorized users and safeguard personal data privacy.
• Digital Infrastructure & Connectivity – Companies that are integral to the development and the buildout of the infrastructure that supports our increasingly connected world.
• Digital Lifestyle – The companies behind our increasingly connected lives.
• EPS Diplomats – Profitable large capitalization companies proven to produce above-average EPS growth and provide investors with the benefit of multiple expansion.
• EV Transition – Capturing the transition to EVs and related infrastructure from combustion engine vehicles.
• Guilty Pleasure – Companies that produce/provide food and drink products that consumers tend to enjoy regardless of the economic environment and potential long-term health hazards associated with excessive consumption.
• Homebuilding & Materials – Ranging from homebuilders to key building product companies that serve the housing market, this model looks to capture the rising demand for housing, one that should benefit as the Fed returns monetary policy to more normalized levels.
• Market Hedge Model – This basket of daily reset swap-based broad market inverse ETFs protects in the face of market pullbacks, overbought market technicals, and other drivers of market volatility.
• Nuclear Energy & Uranium – Companies that either build and maintain nuclear power plants or are involved in the production of uranium.
• Luxury Buying Boom – Tapping into aspirational buying and affluent buyers amid rising global wealth.
• Rebuilding America – Turning the focused spending on rebuilding US infrastructure into revenue and profits.
• Safety & Security – Targeted exposure to companies that provide goods and services primarily to the Defense and security sectors of the economy.
• Space Economy – Companies that focus on the launch and operation of satellite networks.

The Strategies Behind Our Dividend Income Models

• Monthly Dividend Model – Pretty much what the name indicates – this model invests in companies that pay monthly dividends to shareholders.
• ETF Dividend Model – High-yielding ETFs that provide a range of exposures from domestic equities, international equities, emerging market equities, MLPS, and REITs.
• ETF Enhanced Dividend Model – A group of high-yielding ETFs that utilize options to enhance yield through collecting option income.

Don’t be a stranger

Thanks for reading and if you have a suggestion for an article or book we should read, or a stream we should catch, email us at info@tematicaresearch.com. The same email works if you want to know more about our thematic and targeted exposure models listed above.