Inflation Worries, Resilient Labor Market, Palantir's Ascent & More

Good Afternoon. It was a slightly negative week for the major indices, mainly due to Friday's sell-off after the University of Michigan survey pointed to higher inflation expectations. Strong jobs data and higher inflation expectations support a longer Fed pause reflected in the CME probabilities, with ~92% of respondents expecting the Fed to meet the rates unchanged in the next meeting. This week’s key takeaway comes from three charts in the Yahoo Chartbook, along with the manufacturing PMI surpassing 50 for the first time in 26 months. These indicators suggest a strong stock market in 2025, though heightened volatility is likely due to policy uncertainty under the new administration.

• Inflation Expectations Rise: The surprise for the week was a sharp rise in The University of Michigan consumer expectations that the inflation rate a year from now will be 4.3%, a one percentage point jump from January and the highest level since November 2023. The survey was conducted from January 21, the day following Trump’s inauguration, until February 3.

• US Trade Deficit Hit Record: Commerce Department data on Wednesday revealed U.S. imports surged 6.6% to a record $4.1 trillion in 2024, driven by strong demand for auto parts, weight-loss drugs, computers, and food from abroad.

  

• Overall Still A Solid Job Market: Employers added 143,000 jobs in January, falling slightly short of expectations. However, substantial upward revisions for the previous two months and a drop in the unemployment rate to 4% suggest a resilient labor market.

• Manufacturing Rebounds: The manufacturing sector rebounded in January, marking its first expansion after 26 months of contraction, the longest stretch since 1989-1991. The Manufacturing PMI® rose to 50.9 percent, up 1.7 percentage points from December’s seasonally adjusted 49.2 percent, signaling renewed economic growth.

  

• US exceptionalism has slowed down recently compared to Europe, but I think this is due to the higher valuations in the US thanks to the post-election rally. Fundamentally, the US is expected to continue its dominance thanks to its lead in innovation, and all the macro data shows the US economy is doing great.

  

  Source: Bloomberg

For the week:

• The S&P 500 is down 0.24%, the Nasdaq is down 0.53%, and the Dow 30 is down 0.54%.

  

  Source: Barchart

CNN's Fear & Greed Index now stands at 39 (Fear) out of 100, down 7 points from last week. Details here

The top five trending stocks on Reddit are Palantir, Nvidia, SPY, AMD, and MGO Global. Read More

Here is a summary of this week’s key economic releases:

Target Rate Probabilities for the March 19th FOMC Meeting:

CME FedWatch

Stress Test: The Federal Reserve announced Wednesday that its annual stress tests will assess big banks against heightened risks in commercial and residential real estate markets. Additionally, the tests will include an exploratory component evaluating shocks in the non-bank sector and the impact of hypothetical disruptions from multiple large hedge funds on major bank finances. Read

Honeywell Split: Honeywell International is restructuring into three standalone entities: aerospace, automation, and advanced materials. This decision aligns with pressure from activist Elliott Investment Management and mirrors General Electric’s successful split. The company anticipates enhanced financial agility and more specialized leadership for each division. Read

$320 billion AI Capex: Amazon, Alphabet, Microsoft, and Meta are set to invest up to $320 billion this year in artificial intelligence, fueling an industry-wide race to dominate AI infrastructure. Amazon leads with the most aggressive spending plan, committing $100 billion to expand its data centers and computing power. Read

Companies Ditch Diversity Goals: Several companies are scaling back DEI initiatives following criticism that these policies exclude certain employees and customers. Legal concerns have also emerged after the Supreme Court's 2023 ruling deemed race-based university admissions unconstitutional. Read

Ackman’s Invests In Uber: Bill Ackman disclosed that Pershing Square has taken a substantial position in Uber, emphasizing that the stock remains deeply undervalued. He revealed on X that his fund started accumulating shares in early January and now holds 30.3 million shares, valued at $2.3 billion at the current price of approximately $75 per share. Read

Palantir Beat: Palantir reported fourth-quarter earnings and revenue that surpassed Wall Street’s estimates. Along with the fourth-quarter beat, Palantir offered better-than-expected guidance. Read

Google Miss: Google missed Wall Street’s fourth-quarter revenue expectations and unveiled a $75 billion capital expenditure plan to expand its AI infrastructure, intensifying competition with megacap rivals. While overall revenue grew 12% year over year, YouTube advertising, search, and services segments saw a slowdown. Read

AMD Beat: Advanced Micro Devices posted fourth-quarter results that exceeded Wall Street expectations for sales and earnings but fell short in its crucial data center segment. Read

Amazon Beat: Advanced Micro Devices posted fourth-quarter results that exceeded Wall Street expectations for sales and earnings but fell short in its crucial data center segment. For the first time, Amazon is expected to beat Walmart in terms of revenue. Walmart is due to report results on Feb 20th. Analysts expect Walmart's revenue to grow by 4% to $180bn, i.e., lower than the $187bn reported by Amazon with a 10% growth rate. Read

Merck Beat: Merck's 2025 revenue guidance fell short of Wall Street expectations, citing a decision to halt Gardasil shipments to China from February through at least mid-2025. Despite this, the company exceeded fourth-quarter revenue and earnings forecasts, driven by strong sales of Keytruda, other oncology drugs, and its newly launched cardiovascular treatment. Read

Eli Lilly Beat: Eli Lilly reported mixed Q4 results as demand for its blockbuster weight loss drug Zepbound and diabetes treatment Mounjaro surged. While earnings beat Wall Street estimates, sales slightly missed due to lower realized prices for Mounjaro, marking the second consecutive quarter of underperformance amid inventory declines at wholesalers. Read

Yahoo Chart Book Q1 2025:
Yahoo released its Q1 chart book, which contains 44 charts. Below are the top three that I liked the most, as they give great insights into what lies in the year ahead for the markets:

• The first chart shows that US analysts are good at predicting S&P 500 EPS estimates. The same analysis will be helpful for small-cap indices such as Russell 2000, but generally, we can rely on index-level EPS estimates.

• Now, let's think analysts are doing a decent job. The second chart shows that they predict 2025 will be an excellent year for corporate America, with earnings growth far better than the last three years expected in all sectors.

• The third chart shows that the small caps are expected to have better earnings growth after a couple of years of slump. It is important to note that this chart shows S&P 500 earnings growth at ~14%, and the first chart estimated it at ~12%. So, depending on the source, the estimates may vary, but it looks like ~12% is a base scenario.

  
  
  

Rule of 40:
The Rule of 40 is a key financial metric for evaluating a company’s performance in the SaaS (Software as a Service) industry. It combines two factors—revenue growth rate and profit margin—and states that their sum should meet or exceed 40%. By considering growth and profitability, this metric helps investors gauge whether a SaaS company effectively balances expansion with financial health.

Rule of 40 = Revenue Growth Rate (%) + Profit Margin (%)

Rise Of Palantir:

Palantir stock has 12X in two years. I remember seeing it trading at ~$7 not long ago and regret not buying it then. Palantir has made inroads into the highly monopolistic defense industry. Below is the performance of Palantir against the rule of 40 explained above from the recent earnings presentation-

• What does Palantir Do?:

  • Palantir’s Gotham platform helps the U.S. government track and locate terrorists by aggregating intelligence data and uncovering hidden connections. It maps relationships, timelines, and potential future threats with clear visualizations that simplify complex insights.

  • However, Palantir’s real growth engine is Foundry, an AI-powered business platform. Large enterprises generate overwhelming amounts of data daily, and Foundry consolidates, analyzes, and translates that data into actionable strategies that drive revenue and cut costs. Palantir’s latest earnings report shows surging demand for Foundry, with sales up 64% in the past year and its customer backlog doubling.
    

  This week, I listened to a Bloomberg podcast in which Shyam Shankar, Palantir's CTO, discussed the lack of innovation in the defense sector and Palntir’s role. I was impressed by Shyam's knowledge and deep understanding and was convinced that the company is run by credible management. This is not investment advice but my reading of the company and its leadership.
  

Europe Vacation Expected To Get Cheaper 😃

The euro is under pressure amid speculation that the US may impose trade restrictions on the region’s export-driven economies, forcing the European Central Bank to take a more aggressive rate-cutting stance. Thus, 2025 may turn out to be a good year to plan your European vacation.