A Solid Start to 2025 for Stocks; Bonds Gain as Well
HIGHLIGHTS:
- Stocks: After a challenging December, stocks kicked off 2025 with solid gains. Small- and large-caps; value and growth; and U.S. and international stocks also started the year on a positive note.
- Bonds: Yields were flat in January. After a steep rise at the start the year, yields fell in the latter half of January, which helped bonds to post positive returns for the month. The 10-year U.S. Treasury yield ended 2024 and January 2025 at 4.58%.
- U.S. Economy: Economic data released in January (largely covering December) showed ongoing signs of solid economic growth. The first reading of fourth-quarter GDP showed a 2.3% annualized growth rate in the final quarter of 2024.
- Federal Reserve: After three consecutive meetings of cuts, the Fed paused in January and the FOMC left policy rates unchanged. This was a widely anticipated move as the Fed is expected to only raise rates once in 2025. (Per CME FedWatch tool as of 2/3/25)
EQUITY MARKETS
The broadening theme we experienced in 2024 resumed in the new year. U.S. and international stocks enjoyed gains in January. See Table 1 for January 2025 and calendar year 2024 results.
Table 1
| Index | Jan-25 | 2024 |
| S&P 500 | 2.78% | 25.02% |
| S&P 500 Equal Weight | 3.50% | 13.01% |
| DJIA | 4.78% | 14.99% |
| Russell 3000 | 3.16% | 23.81% |
| NASDAQ Comp. | 1.66% | 29.57% |
| Russell 2000 | 2.62% | 11.54% |
| MSCI ACWI ex U.S. | 4.03% | 5.53% |
| MSCI Emerging Mkts Net | 1.79% | 7.50% |
Reflecting the broad progress of U.S. equities and gains beyond the mega-cap growth companies, the equal-weighted S&P 500 Index outpaced its large-cap counterpart in January. That was an uncommon event in 2024. The tech-driven Nasdaq Composite Index had the weakest relative gains in January, a reversal from strong relative returns experienced in 2024 as shown when comparing the indices in Table 1. This reflects the broadening of the bull market at the outset of 2025. While one month does not establish a trend, market leadership shifted across different sectors throughout 2024, and a continued broadening across various areas of the U.S. stock market wouldn’t be unexpected. It is important to acknowledge that 2024 was another year dominated by large-cap growth companies. Developed international stocks had some of the strongest results to begin the new year. After years of underperformance compared to U.S. stocks, the MSCI ACWI ex. U.S. Index started 2025 on a strong note. Emerging market stocks also started the year positively but lagged in developed international market equities.
Fixed Income
The seemingly relentless rise in rates during the fourth quarter of 2024 paused in January as rates were flat. The 10-year U.S. Treasury yield ended 2024 and January 2025 at 4.58%. However, that does not tell the whole story. Rates rose at the start of the year and peaked at 4.79% on January 13, but fell sharply for the remainder of the month. This rate decline helped bonds advance for the month. See Table 2 for bond index returns for January 2025 and calendar year 2024.
Table 2
| Index | Jan-2025 | 2024 |
| Bloomberg U.S. Agg | 0.53% | 1.25% |
| Bloomberg U.S. Credit | 0.56% | 2.03% |
| Bloomberg U.S. High Yld | 1.37% | 8.19% |
| Bloomberg Muni | 0.50% | 1.05% |
| Bloomberg 30-year U.S. TSY | 0.16% | -8.09% |
| Bloomberg U.S. TSY | 0.52% | 0.58% |
| MSCI ACWI ex U.S. | 4.03% | 5.53% |
In last month’s Benchmark Review, we noted “Modest and volatile returns were the themes for the bond market in 2024 outside of high-yield bonds.” That theme continued in January, but on a positive note, the trend of rising rates seemed to be broken (or at least disrupted) during the second half of the month as rates declined. Returns were similar across different bond indices except for high-yield bonds and the lagging 30-year U.S. Treasuries. High-yield bonds continued their leadership from 2024 to start 2025. (Our tactical fixed income strategy has been allocated to high-yield bonds since early November 2023 and we maintain that exposure as of this writing). In our 2025 outlook, we put an upper-end range on the 10-year U.S. Treasury yield at 5%. We did not hit that level early in the month, but yields moved in that direction until the mid-month reversal in rates. We believe rates on the front end of the yield curve will be pressured lower as the Fed (albeit slower) cuts rates and longer rates will remain more volatile, but with broader pressure to the downside.
We maintain our long-standing position that favors credit versus pure rate exposure in this interest rate environment as it served us well in 2024 and so far in 2025. Additionally, we believe bonds provide stable cash flow and help to offset the long-term volatility of stocks in the long run. Furthermore, we believe bond yields remain attractive, as witnessed by some of the strongest bond yields in years, especially considering the recent rate increase. In our opinion, having an active bond management approach makes sense in volatile times.
Economic Data Highlights and Outlook
Jobs: The new year began with another solid reading from the job market. In December, payrolls increased by 256,000, well ahead of the expected 165,000 additions. Furthermore, the unemployment rate surprisingly dropped to 4.1%, down from the expected and prior month’s level of 4.2%. Overall, the job market remains healthy with a low unemployment rate and plentiful job openings. Consumer spending accounts for about 70% of the U.S. economy, so monitoring job market data is critical as it directly impacts consumer spending. One data point we are monitoring is job openings compared to the unemployment level — there are still more jobs available than people seeking jobs. This ratio has narrowed during the last few years. However, the latest readings show a tick higher in job openings and a tick lower in the unemployment level. Chart 1 shows the number of unemployed compared to the number of job openings in the U.S.
Chart 1
Inflation: Inflation: Inflation data was largely flat but better-than-expected for December . The producer price index excluding food and energy was flat compared to the 0.3% monthly increase that was expected. The annual gain was flat at 3.5%, compared to the anticipated 3.8% increase. The headline reading was higher on an annual basis compared to last month, but lower than expected. The consumer price index was in line with expectations on a headline basis and slightly better (lower) on a core basis for the month and year. Finally, the annual gains for the personal consumption expenditures price index, both headline and core (the preferred inflation measure of the Fed), were in line with expectations for December. The core reading matched the prior month’s annual gain while the headline reading was higher for the year through December than it was through November. (For specific data, please refer to the end of this report.)
Overall, we believe inflation continues to make progress toward the Fed’s ultimate stated goal of around 2% for the core PCE price index reading. We expect this path to be bumpy, but believe the trend continues to show progress on the inflation front. Fed Chairman Powell said he will continue to lead the Fed until his term expires in May 2026, which includes overseeing monetary policy decisions. The market is pricing in only one rate cut in 2025 and the FOMC paused rate cuts during the January meeting. While some inflation concerns linger as we change to a new administration, driven largely by concerns about the impact of new tariffs, slower and fewer rate cuts should ease some of that fear. Chart 2 shows the core CPI and PCE price indices (recall the Federal Reserve targets the core PCE reading).
Chart 2
GDP: The first reading of the fourth quarter of 2024 GDP was somewhat disappointing. Following a surprisingly positive final reading of the third quarter GDP of 3.1%, the advance or preliminary reading of the fourth quarter GDP showed a 2.3% annualized growth rate. Expectations were calling for a reading of 2.6%. The Atlanta Fed GDP Now estimate for the first quarter of 2025 growth is 3.9% (as of 2/3/25), indicating a potentially solid beginning to the new year. We believe that GDP growth has the potential to be around 2.5% in 2025. Chart 3 shows GDP readings from the second quarter of 2021 through the first estimate of the fourth quarter of 2024..
Chart 3
Other Economic Data Points: The ISM indices were better than expected in December. The ISM Manufacturing Index came in at 49.3 compared to expectations of 48.2 but remained below the expansion/contraction line of 50. (However, the ISM reading for January was 50.9, surpassing estimates of 50.0, and moving into expansion territory for the first time in over two years). The ISM Non-Manufacturing Index, which covers the much larger service industries in the U.S. economy, rebounded to 54.1 compared to expectations of 53.5. Both readings improved from November levels.
Housing, which has faced a headwind of recent higher rates, found some footing in December with better-than-expected readings across the board. Housing starts, preliminary building permits, and new and existing home sales surpassed expectations when data was released in January. Furthermore, all readings except for preliminary building permits improved from November.
Retail sales (ex. auto and gas) noted a 0.3% monthly gain in December but were behind expectations of 0.4% growth. The preliminary University of Michigan Sentiment reading for January fell to 73.2 compared to expectations and the prior reading of 74.0. The Conference Board’s Leading Index fell back into negative territory with a -0.1% reading after posting a revised 0.4% gain in November.
The stock market began the new year on a positive note. Following two years of solid gains, 2025 started with a broad-based stock market advance as well. Bonds were modestly positive in January after fighting off rising rates at the start of the month. While ultimately flat, rates moved lower during the latter part of January and bonds advanced. From a market perspective, there is an overall sense of a more business and regulation-friendly environment with the new administration, but there is also concern regarding tariffs and their potential impact. This year we will monitor new policies and their influence on the market and economy, but emphasize that chasing news headlines is ill-advised in a very fluid environment. Focusing on market fundamentals, we believe the economy is solidly growing, the Fed will cut interest rates (slower than expected), and the fairly reasonably valued stock market and S&P 500 companies have the potential to increase their earnings by approximately the mid-teens in 2025. We like that fundamental backdrop as we begin 2025. As always, we believe investors must stay focused on their long-term goals and not let short-term swings in the market derail them from their longer-term objectives.
Clark Capital’s Top-Down, Quantitative Strategies
The economy ended 2024 on a high note, increasing 2.3% in the fourth quarter. For the 2024 year, the economy grew at a 2.5% pace. Starting in 2025, the economic momentum continues and, as such, the Federal Reserve held overnight rates steady at its January 29 meeting after cutting rates during the prior three sessions. After faltering in December, the markets posted solid returns in January – the S&P 500 gained 2.78%, the Russell 2000 gained 2.62%, the S&P 500 Equal Weight gained 3.50%, and the MSCI ACWI ex-US gained 4.03%. Fixed income indices also posted gains – the High Yield Index was up 1.37%, and the 7-10 Year Treasury Index was up 0.67%.
Historically, February is the second worst month of the year for S&P 500 returns; September is the first. While DeepSeek and tariff news have caused volatility, the markets are muting the noise and focusing on solid fundamentals. In our 2025 outlook, we stated that we believe it will be a good year for stocks, but not a straight line higher, and with increased volatility. So far, it looks like we are getting that.
Clark Capital’s Bottom-Up, Fundamental Strategies
U.S. equities gained in January, supported by positive market breadth. The S&P 500 Equal Weight outperformed the cap-weighted S&P 500 Index by over 70 basis points, while small-caps recovered from their December decline. Treasuries were firmer with the yield curve steepening amidst the Trump administration deregulation dynamics.
Chinese AI maverick DeepSeek suppressed gains in large-cap growth, AI infrastructure, and utility stocks at month’s end as their model’s gains from cheaper semiconductors raised questions about the potential return on expensive CapEx investment. The next 12-month earnings expectations continue to breach new highs for the S&P 500. If 2025 earnings growth fails to meet expectations, a market defensive rotation could benefit dividend stocks. Treasury yields were steady during the month as 2-year and 10-year Treasury yields stayed near 4.2% and 4.5%, respectively.
ECONOMIC DATA
| Event | Period | Estimate | Actual | Prior | Revised |
| ISM Manufacturing | Dec | 48.3 | 49.3 | 48.4 | — |
| ISM Services Index | Dec | 53.5 | 54.1 | 52.1 | 52.5 |
| Change in Nonfarm Payrolls | Dec | 165k | 256k | 227k | 212k |
| Unemployment Rate | Dec | 4.2% | 4.1% | 4.2% | — |
| Average Hourly Earnings YoY | Dec | 4.o0% | 3.90% | 4.00% | — |
| JOLTS Job Openings | Nov | 7740k | 8098k | 7744k | 7839k |
| PPI Final Demand MoM | Dec | 0.40% | 0.20% | 0.40% | — |
| PPI Final Demand YoY | Dec | 3.50% | 3.30% | 3.00% | — |
| PPI Ex Food and Energy MoM | Dec | 0.30% | 0.00% | 0.20% | — |
| PPI Ex Food and Energy YoY | Dec | 3.80% | 3.50% | 3.40% | 3.50% |
| CPI MoM | Dec | 0.40% | 0.40% | 0.30% | — |
| CPI YoY | Dec | 2.90% | 2.90% | 2.70% | — |
| CPI Ex Food and Energy MoM | Dec | 0.30% | 0.20% | 0.30% | — |
| CPI Ex Food and Energy YoY | Dec | 3.3% | 3.2% | 3.3% | — |
| Retail Sales Ex Auto and Gas | Dec | 0.40% | 0.30% | 0.20% | — |
| Industrial Production MoM | Dec | 0.30% | 0.90% | -0.10% | -0.20% |
| Building Permits | Dec P | 1460k | 1483k | 1493k— | |
| Housing Starts | Dec | 1327k | 1499k | 1289k | 1294k |
| New Home Sales | Dec | 675k | 698k | 664k | 674k |
| Existing Home Sales | Dec | 4.20m | 4.24m | 4.15m | — |
| Leading Index | Dec | -0.10% | 0.3% | -0.4% | — |
| Durable Goods Orders | Dec P | -0.10% | -0.10% | 0.30% | 0.40% |
| GDP Annualized QoQ | 4Q A | 2.60% | 2.30% | 3.10% | — |
| U. of Mich. Sentiment | Jan P | 74 | 73.2 | 74 | — |
| Personal Income | Dec | 0.40% | 0.40% | 0.3o% | — |
| Personal Spending | Dec | 0.50% | 0.70% | 0.40% | 0.60% |
| S&P CoreLogic CS 20-City YoY NSA | Nov | 4.24% | 4.33% | 4.22% | 4.23% |
—Source: Bloomberg: A=Advanced, P=Preliminary
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