by Jason Bodner
March 4, 2025
It’s March! Happy New Year – if you were born before 45 B.C.
March was the first month of the year before the Roman calendar was established. These days, March is the third month, and it is also a historically strong month of the year, using our data, beginning in 1990:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
One look at last week and February’s performances shows us nothing to be excited about, from the table below, but that is in contrast to the earnings season for the fourth quarter of 2024, now wrapping up. As of this writing, 97% of the S&P 500 companies have reported. Despite stellar results, February took a dive:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Looking at the laggards, we notice that small caps and growth sectors are under attack. The S&P Small Cap 600 was down 7.14% in February. Discretionary stocks were down more than 11%. The Russell 2000 Growth is down 8.25%, and semiconductors are getting smoked, down 9.25% in the last week.
Based on that, one might assume it was an abysmal earnings season. But that’s not the case. With 97% of the S&P 500 reporting, approximately 76% beat earnings estimates, and 62% beat sales estimates.
That’s very close to the 5-year and 10-year averages:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
For Q4 2024, the blended year-over-year earnings growth for the S&P 500 is +18.1%. If it stays that way, it will easily mark the highest year-over-year earnings growth rate reported by the index since Q4 2021.
Digging even deeper, we see that 10 of the 11 S&P 500 sectors contributed to earnings growth, led strongly by the Financials (+56%). Only Energy was negative (-26.5%):
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
So, maybe all the February red ink is not due to earnings. Could it be valuation concerns? The forward 12-month P/E ratio for the S&P 500 is 22.2, above the 5-year average (19.8) and 10-year average (18.3):
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The trailing 12-month P/E ratio is high as well, but not that high: It hardly seems like a cause for alarm:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The S&P 500 is only part of the picture. The breadth of the entire market (i.e., stocks going up vs. those going down) has been deteriorating for some time now, so I decided to look back at recent periods and do some comparison in terms of breadth and broad valuation. Here are three conclusions that stood out:
- On November 29th (my birthday), only 35% of stocks (or 1,866 of 5,389 in my database that day) were trading below their 50-day moving average. The average P/E ratio (trailing 12 months) for those 5,389 stocks was 40.5 – substantially higher than the S&P 500. This stands to reason, as many smaller-cap companies are high growth in nature, so they trade at richer multiples.
- On February 19th (the latest market peak day), 5,001-stocks scored in my data. This is fascinating, because the S&P 500 reached an all-time high, yet fewer stocks were scoring. This is due to lower volumes and lower share prices, rendering some stocks ineligible to score. At that point, 46.9% of stocks (or 2,348) were trading below their 50-day moving average, substantially higher than in late November. The average P/E ratio (trailing 12 months), for those 5,001-stocks was 38.3. This means the valuation correction had begun as the major indexes made their highs.
- On February 27th (this year’s market trough day), 4,961-stocks generated a score in my data as the market reached a year-to-date low with even fewer stocks scoring. Again, stocks must have a certain price and average liquidity to even generate a score. At Thursday’s low point, 60.4% of stocks (or 2,997) were trading below their 50-day moving average, which is substantially higher than in late November and February 19th. The average P/E ratio (trailing 12 months), however, for those 4,961-stocks was 35.3. This means a valuation correction of -12.9% has taken place.
This valuation correction is appearing in the S&P sectors too. It is not a bullish sign when discretionary and technology stocks rank near the bottom. To make matters worse, the defensive sectors have pushed their way to the top of the sector strength chart. This is due mainly to their recent technical strength:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
We see strong buying in Utilities stocks, a leading defensive sector. Financial stocks remain strong, Real Estate has been gaining ground and even Staples have seen steady buying:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
All the while, technology and discretionary stocks have seen selling. This highlights a rotation out of growth and strength into the more defensive sectors, or what is better known as a “flight to safety.”
Looking again at the sector strength and weakness chart above, we see divergence between technical and fundamental scores. For example, the technical score for utilities is 69% while it’s fundamental score is 53.6%. Contrast that with technology’s technical score of 47.7 and fundamental score of 60.4%.
That’s a flip-flop from a growth scenario.
This rotation is pressuring the Big Money Index (BMI). The BMI fell from 63.2 on February 19th to 53.8% on February 27th in just six trading sessions – during an excellent earnings reporting season:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Looking at unusual inflows and outflows in stocks and ETFs, we see a sudden change in sentiment:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Suddenly, unusual inflows dropped while outflows increased. They have increased so much that I decided to seek out any historical analogs. Currently, the 5-day average outflows count is well over 100 (at 171). This gives us a 5-day average ratio of 25.4%, meaning only 25.4% of all signals over the last 5-days on average were inflows. That is getting close to extreme selling but not quite there:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
I looked at all similar instances using the following parameters: 5-day ratio average of 40% or less with a minimum 100 5-day average outflow count. I found 626 instances like this since 1990.
As often happens in such historical surveys, the forward returns were solid:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The bottom line is that market sentiment is low. One contributing factor is that consumer spending is slowing. The latest data has further pressured equities. Let’s not forget, though, that the weather has been harsh across much of the country, which affects consumer spending.
As earnings season wanes, short selling and shenanigans pick up until the next earnings reports. But therein lies the key: Earnings are working very well. There is fear that growth may cool, and some even fear Trump’s administration will nudge us into recession. But that recession fear is always there.
In the end, the best defense is a great offense. Identify the best quality stocks with the highest fundamentals and big inflows. They are the ones that historically weather the storm.
You never know whether the storm may continue intensifying, or the clouds may part next week. Either way, stay the course with great stocks through any weather:
“Climate is what we expect, weather is what we get.” -Mark Twain
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
The Blow-up in Washington – and its Likely Repercussions
Income Mail by Bryan Perry
The Fed May Cut Rates Sooner Than Expected–to Deal with a Tighter Job Market
Growth Mail by Gary Alexander
March in Market History – and Some Great March 4th Inauguration Messages
Global Mail by Ivan Martchev
The Bond Market Is Beginning to Worry (a Little) About the Economy
Sector Spotlight by Jason Bodner
March – A New Month That is Almost Like a New Year!
View Full Archive
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Jason Bodner
MARKETMAIL EDITOR FOR SECTOR SPOTLIGHT
Jason Bodner writes Sector Spotlight in the weekly Marketmail publication and has authored several white papers for the company. He is also Co-Founder of Macro Analytics for Professionals which produces proprietary equity accumulation/distribution research for its clients. Previously, Mr. Bodner served as Director of European Equity Derivatives for Cantor Fitzgerald Europe in London, then moved to the role of Head of Equity Derivatives North America for the same company in New York. He also served as S.V.P. Equity Derivatives for Jefferies, LLC. He received a B.S. in business administration in 1996, with honors, from Skidmore College as a member of the Periclean Honors Society. All content of “Sector Spotlight” represents the opinion of Jason Bodner
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