RALLY AUTOPSY REVEALS NO CLEAR NEAR TERM CATALYST

Hello and thanks for reading this week’s No Straight Lines Investments blog, I truly appreciate your time and attention.

Dissecting the source of the rally back to Liberation Day levels, is a high utility exercise, if only to determine whether the same drivers are likely to continue the upward momentum in equities.

Earnings

I alluded to Q1’s 12% y/y earnings growth in last week’s blog, the chart above from David Kostin of GS simply lays out expectations for the next 3 q’s and beyond.

Most of the Q1 beat was driven by margins increasing >1% to 12.1%.

Is this sustainable? The answer depends upon whom you ask:

We know that GDP growth in the U.S. is likely to step down from 2024’s 2.8% (2025 consensus is 1.4%) and we know that tariffs, even if reduced, are likely to have some impact on margins.

Taken together, slower topline with flattish margins appears reasonable, which brings us to the $255 range in eps for the S&P 500 for 2025, implying 3.7% earnings growth in 2025.

Valuation

Obviously earnings don’t occur in a vacuum, we always need to consider what is priced in.

The market is not cheap based on any historical measure, full stop.

When the market was down 19% peak-to-trough in early April, it was a more appealing entry point.

The subsequent month’s rally has removed the relative cheapness.

If we extrapolate Q1 earnings for the full year, the picture is marginally improved, but valuation over the course of the next few quarters will remain a headwind.

Positioning

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Thanks for reading and good luck with your investments!

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