Key takeaways:

  • The durability of the current rotation in market leadership rotation largely depends on the trajectory of earnings growth during the upcoming reporting season and beyond.
  • Investors have to discern between rotations driven by earnings growth and those driven by optimism, such as higher business sentiment measures.

January 29, 2025 – Over the past few weeks, several key themes have captured investors' attention, including the rapid rise and subsequent fall of interest rates, renewed investor confidence, and shifts among equity sectors. We can note the potential improvement in market breadth. For example, on Monday, January 27, despite the S&P 500® Index declining by nearly 1.5%, over 300 of its constituent stocks posted gains, underscoring healthy market breadth beneath the Index level.

 

A graph illustrating the estimated year-over-year earnings-per-share growth

The rapid shift in expectations over the past month highlights the increased volatility investors face in the changing landscape of economic data, fiscal policy, interest rates, and the Federal Reserve's responses. The main issue for investors to focus on is understanding the sustainability of the market leadership rotation happening beneath the Index level. This rotation largely depends on the path of relative earnings growth during the reporting season and beyond.

In this uncertain environment, investors need to distinguish between rotations driven by solid evidence, like relative earnings growth, and those driven by increased optimism, such as higher business sentiment measures. The accompanying table shows the current consensus expectations for various indices, highlighting high hopes for broader earnings growth, especially for value, international, and small-cap stocks.

However, as investors have learned over the past few years, consensus expectations don't always come true. For example, at the start of 2024, there were high hopes for small caps, with expected earnings-per-share (EPS) growth of 10% for the S&P SmallCap 600® Index. Instead, the Index ended 2024 with a year-over-year earnings decline of about 6%. Rising interest rates and a more hawkish Federal Reserve repeatedly delayed the earnings recovery, continuing to pressure small-cap stocks.

While it's encouraging to see higher expectations for earnings growth in 2025, investors should keep an eye on EPS revisions throughout the year. As the past few years have shown, just because the consensus expects something doesn't mean it will actually happen.
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Author(s)

Mark Hackett, CFA, CMT

Chief Market Strategist, Nationwide Investment Management Group

Mark Hackett is the Chief Market Strategist for Nationwide’s Investment Management Group, bringing more than 20 years of experience in the asset management industry to the role.

Full bio

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