Major indexes finished January higher, with the S&P 500 Index climbing 2.8%, the Dow rallying 4.8%, and the tech-heavy Nasdaq posting a modest gain of 1.7%. As measured by Russell indexes, value stocks outperformed shares by 2.7% during the month. The market's performance in January reflected a complex interplay of various factors. The market initially rallied after Donald Trump's inauguration, with the S&P 500 reaching an all-time high earlier in the month. While the market was supported by generally positive Q4 corporate earnings, a Chinese startup, DeepSeek, disrupted the AI landscape during the month, leading to a significant selloff in U.S. tech stocks, with the Nasdaq dropping 3% on January 27. Additionally, following the Fed's decision to pause at its January meeting, market expectations for the Fed's policy became slightly more hawkish, with the next rate cut not anticipated until the summer. Our forecast remains that the U.S. economy will likely grow slightly above trend with moderating inflation and broadening earnings growth. However, risks such as high equity valuations, geopolitical tensions, and policy and trade uncertainties persist. The stretched valuation and institutional investors' significant overweight positions in equities increase the market's vulnerability to pullbacks. We remain cautiously optimistic and have slightly increased our allocation to U.S. equities in our defensive, tailored approach from 59% to 61%. 

What's Driving the Markets?

President Trump’s inauguration and policy uncertainty: The equity market generally reacted positively to Donald Trump’s inauguration for his second term, with all major U.S. equity indices posting gains on the first day after the inauguration. The upward movement was largely due to his less aggressive stance on tariffs in the first week of the Trump administration than some investors had initially feared: instead of imposing a new round of tariffs on day one, President Trump issued a presidential memorandum calling on federal agencies to review U.S. trade policies and deliver reports by April 1. We anticipate that further changes to tariff policy could be announced after the April 1 reports, with implementation occurring 30-60 days thereafter. However, on January 31, President Trump reaffirmed his plan to enforce a 25% tariff on imports from Mexico and Canada by February 1, while also warning of an additional 10% tariff on Chinese goods. Overall, we believe policy uncertainty remains high. While tax cuts and deregulation could enhance corporate earnings and potentially boost risk asset performance, aggressive tariffs and stricter immigration policies might pose downside risks to inflation and growth. 

"Wait-and-see" Fed policy: After cutting rates in the previous three meetings, the Fed decided to pause and maintain the fed funds rate target range at 4.25% to 4.5%. This decision signals a "wait-and-see" approach as the Fed assesses incoming data and the potential impact of the Trump administration's new policies. We believe that the Fed's decision reflects several key factors: 1) sticky inflation: the January statement now describes inflation as "somewhat elevated," compared to December's assessment that "inflation has made progress toward the Committee's 2 percent objective." 2) solid labor market with December payroll employment rising by 256,000 and the unemployment rate ticking down to 4.1%. 3) Economic Growth: U.S. economic growth remained healthy, with the fourth quarter GDP coming in at 2.3%. 4) Policy uncertainty: The Fed is likely adopting a cautious approach, monitoring the new Trump administration's economic policies, as some policy changes, especially tariffs and immigration, could prove inflationary.

Strong corporate earnings: The Q4 2024 earnings report is underway. Among the 36% of S&P 500 companies that have reported results, 77% have reported a positive EPS surprise, and 63% have reported a positive revenue surprise. At the same time, the blended year-over-year (YOY) earnings growth for the S&P 500 is 13.2%. While in recent years earnings growth has been primarily driven by mega-cap tech companies, analysts now forecast that earnings strength is likely to broaden beyond tech companies. For example, less strict regulation from the Trump administration could benefit the financial sector. Traditional energy production could also be boosted by Trump’s new policy, which includes simplifying the process of getting permits for constructing energy infrastructure. Despite these positive trends, companies have been more cautious in their guidance.

By the Numbers

As of 1/31/25. Data provided by Bloomberg, NorthCoast Asset Management, Federal Reserve History.

The NorthCoast Navigator is a market barometer displaying NorthCoast's current U.S. and international equity exposure and outlook. This aggregate metric is determined by multiple data points across four broad market-moving dimensions: Technical, Sentiment, Macroeconomic, and Valuation. The daily result determines equity exposure in our tactical strategies. 

NorthCoast Asset Management is a d/b/a of, and investment advisory services are offered through, Kovitz Investment Group Partners, LLC (Kovitz), an investment adviser registered with the United States Securities and Exchange Commission (SEC). Registration with the SEC or any state securities authority does not imply a certain level of skill or training. More information about Kovitz can be found at www.kovitz.com.

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