10 Feb 10th February 2025
Index Movement Last Week
| S&P500 | -0.2% |
| Nasdaq | +0.0% |
| Aussie All Ords | -0.1% |
Markets had a volatile week that ended with basically no change. Last Monday, stocks fell because Trump announced tariffs against Mexico, Canada and China. But then stocks staged a recovery through Tuesday, Wednesday and Thursday as Mexico and Canada gave into demands that they improve their boarder protection and tariffs were put on hold for 30 days. China wasn’t as accomodating and simply retaliated with tariffs of their own on select US products.
It seems Trumps use of tariffs has been effective so far. He can do it because the US is the gorilla in the room. For example, consider Mexico. The US is their biggest trading partner. If Trump added 25% tariffs on all Mexican goods, US companies would likely source product elsewhere. So it is cheaper for Mexico to send 10,000 troops to the boarder than lose sales. Trump can do this when his economy is much bigger than his target. Doesn’t work against China because they are just as big and can fight back in the same way.
Should we be concerned about these tariffs?
No. Not yet anyway. The fear is these tariffs could increase inflation. But presently they seem to be doing the opposite. After peaking at 4.8% in mid-january, the 10 year Treasury yield has been falling since.
The five year inflation expectation has been falling during this time too
The tariff threat does not seem to be causing markets any duress.
Even here in Australia, the announcement over the weekend of a US 25% tariff on all imported steel and aluminium does not seem to be causing too many problems.
The US imported about $638m worth of Australian steel in 2024, the UN’s COMTRADE database shows, and the US is our third largest export market for Aluminium. Yet RIO and BHP are only trading down 1% today. Nothing out of the ordinary.
So for all the talk and fear of what tariffs might mean, I don’t see anything in the market reaction to warrant action from us.
Earnings Summary
As of Friday 62% of S&P500 companies had reported Q4 results and overall it has been positive.
77% have beaten estimates and the average beat is 7.5%.
Whilst this sounds impressive, consider they always beat. Well, not always, but the long run average is 75%, so 77% means things are as normal. But the size of the beat has been good. Normally we get 5%-6% above estimates. This 7.5% beat is significantly higher though and demostrates that corporate American is healthy and profitable.
There is a lot of talk about what these tariffs might do in the back-end of the year but companies are well positioned for any challenges that come.
AI Spend
DeepSeek’s announcement of a low cost AI sent a few waves through the markets 2 weeks ago. But, let’s face it, DeepSeek does not further AI in any way and is not really a competitor to the US models. The big guys know this and all stated how much they were going to spend this year on development.
Meta is nearly doubling its spend, and Microsoft is taking its $56 billion from last year to $80 billion. Then on Tuesday, Alphabet put $75 billion on the board. And now, Amazon has stepped in to hit 12 figures — with $105 billion. Add up the Big Four’s AI shopping lists, and you get $325 billion, a 46% increase over last year.
Clearly, these companies are all-in.
Why aren’t you?
Tesla
There have been a series of negative events for Tesla (TSLA) over the course of this week, most importantly a number of very weak sales numbers around the world. Preliminary sales data from China’s Passenger Car Association showed January shipments down 12% YoY and 33% MoM; that compared with new energy vehicle (China’s designation for BEV, PHEV, and other vehicles which aren’t pure ICE drivetrains) sales up 31% YoY (or -40% MoM). Similar numbers came from Germany earlier this week, where December sales were reported down 59% YoY to the lowest total sales volumes since July 2021. German EV sales were +54% YoY overall in December. France earlier reported a 63% YoY drop in TSLA sales while they were down 12% YoY in the UK. Sales are also falling in TSLA’s biggest US market (California). The company is of course promising new product lines this year, but without any concrete information on those products it’s hard to be sure how they will impact sales volumes. On the Q3 call, guidance was for “slight growth” in deliveries during 2024 (they fell 1%) while 2025 growth was forecasted “+20% to +30%”. Instead, a series of major markets are showing a weak start to the year, and those strong expectations for 2025 were downgraded to the more modest “return to growth” in it Q4 earnings report.
Tesla stock is taking notice and is down 23% from its highs.
Royal Carribean
I am pinching the following from Bespoke Investment Group so they need credit for this observation.
Royal Carribean was upgraded to investment grade last week by Standard & Poors. In April 2020 the cruise operator was cut to junk following the collapse of it’s business due to Covid 5 years ago. But booming demand for cruises has led to record bookings and a huge recovery in cashflows. The stock has been recoverying with it
What is quite amazing is the strength of the recovery. The stock has delivered compound returns of 4,500% since 1993, outperforming the S&P500 index by over 2,000%!!!!
The performance of RCL is all the more remarkable when considering its underlying business. It owns extremely costly, long-term fixed assets where demand is subject to swings in consumer preference and the economic cycle. Competition can be fierce because, like airlines, capital employed must be used and price competition is one of the only levers that can be effectively pulled.
Imagine telling someone in March of 2020 that the stock which had lost 83% in two months would outperform the market overall by over 900% on a total return basis in the next half decade, rising by more than 10x even as the market almost tripled.
What really stands out though, and the point of this article, is to show you a leading indicator of bear markets. RCL tends to begin to underperform the index, ahead of eventual bear markets.
One to keep an eye on in future and also one that says we are nowhere near a bear market now.
Warning
Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.