February 14, 2025 – Stocks have stalled after record highs—so what’s next? Bloomberg’s Gina Martin Adams joins Jim Puplava to break down why the Mag 7 stocks may be losing steam, why high valuations aren't enough to drive further gains, and how other sectors like financials and healthcare are quietly making a comeback. They also tackle energy struggles, market-cap concentration, AI risks, tariffs, and the soaring price of gold. If you want a sharp, data-driven look at where the market is heading in 2025, this is a must-listen interview. Tune in now!
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Key points discussed in today's interview:
- The Mag 7’s Leadership Is Fading – Why tech stocks are struggling to maintain dominance.
- Market Rotation in 2025 – Financials and industrials are emerging as new leaders.
- Energy Sector Challenges – Despite beating expectations, energy stocks are underperforming.
- Healthcare’s Comeback – Why healthcare stocks may be poised for a strong recovery.
- Tariffs & Trade War Risks – How new policies could impact multinational companies and the S&P 500.
- The Impact of a Strong Dollar – Potential earnings disruptions for global corporations.
- Political Influence on Markets – How election results and policy shifts are shaping investor sentiment.
- The Role of Index Funds – Are passive investments amplifying market concentration?
- Gold’s Record Surge – Why gold is rising despite higher interest rates and a strong dollar.
- AI & Tech’s Shifting Landscape – How increasing competition could pressure AI-driven stocks.
Transcript
Jim Puplava:
Well, since hitting new record highs several weeks ago, stocks have been going sideways. Is this a pause before another move up or the beginning of something different? Joining us on the program is Gina Martin Adams, Bloomberg's chief investment strategist. Gina, the S&P is on track to probably double Q4 earnings hurdles. However, the lower beat rate that we've been seeing coming through really hasn't moved the tape on many of these stocks. So, I guess my question is, is this a reflection of expectations being too high, or is it valuations, or both?
Gina Martin Adams:
Yeah, it's a great question, and thank you again for having me on. It's always a pleasure to join you. I think it is both. I think those valuations are a reflection of expectations. So, in a sense, those are the same thing, right? Valuations became somewhat elevated, in particular for large-cap tech and communications stocks, to the point where it became obvious that even with a beat, it was just not enough for those companies to continue to outperform and the stocks to continue to rise, except in the cases where those companies can confirm those expectations, right? We saw that a little bit with Meta, which continued to break to new highs, and select other stocks in the tech space as well. But I think broadly, what we're sitting at is a position where the Mag 7 have carried the index so far for so long, but now that group is seeing a little bit of deceleration in earnings momentum at a time when expectations are extremely high and valuations have just priced for very significant earnings growth to continue, and the companies can't quite keep pace. They're going to have to keep spending; they're not seeing monstrous revenue growth to drive margin expansion going forward. And so, investors are sort of right-sizing those expectations, and we may be stuck in that range for quite some time.
Jim Puplava:
I want to move on to speaking of beating. You talk about the energy sector keeps beating by the widest margin, but it hasn't really done much for energy stocks. They popped a little bit after December, they hit sort of a high, but then they've been drifting downward.
Gina Martin Adams:
Yeah, and really, that's a matter of, for energy, beating by a wide margin has really been losing less than expected. So, it's not a particularly great story within the energy space. Just the fact that we can't gather any earnings momentum there has been really problematic for the sector for a long time now. It was one of the biggest drags on the S&P 500 last year and is still really struggling to gather any momentum this year. And I think that has really hurt. The price momentum for the space has really been hurt by, one, from a macro perspective, just a lack of upside pressure on inflation. Inflation had been accelerating; now it's basically stable, maybe re-accelerating a teeny bit here in the short run, but not much directly from the price of commodities in the energy space particularly. And then, secondly, that has fed through to just a really grim kind of earnings landscape for energy. The space posted negative 20% earnings growth in 2024 and is still really struggling to gather much momentum in 2025. And so, even though the companies are beating as much as the analysts had anticipated, it's still not enough to really spark some interest in the long-term investment potential of this sector.
Jim Puplava:
I want to talk about something you and I were talking about just before we went on the air. The Wall Street Journal did an article: "America's most famous stock market measure is broken more than usual." And they talked about how the Dow has underperformed the S&P the last two years by 10 full percentage points. And basically, they attribute that to the Mag 7 stocks in the S&P 500. And I think technology is only about 13% in the Dow. And they say that the Dow is more reflective of the unweighted S&P. But this is probably the biggest period of time where we've seen the S&P and Dow move in opposite directions more than ever before. I'd like to get your take on that.
Gina Martin Adams:
Yeah, I don't actually think it's all that rare to see the market-cap-weighted index strongly outperform a price-weighted index. I do think that we've been in an unusual period of time in which most stocks have been rising, but the biggest of the big stocks have risen the most, and certainly, the biggest of the big stocks have driven, therefore, the vast majority of performance for a market-cap-weighted index. And there are periods in the past in which this happened as well, though this has been more so than those periods in the past. So, it's sort of an amplified version of that. We started to see that reverse a little bit in January, and I think that may be one of the biggest stories for 2025, ultimately, is we do see a rationalization of this market-cap concentration as a likely outcome of earnings rotation in the S&P 500. And what I mean by that is the biggest stocks, and in particular the biggest sectors, especially tech, which is now 30% of the market cap of the S&P 500, had been driving a great deal of the earnings optimism on the index in 2023 and 2024. That was really what was unique: in 2023 and 2024, we had an outright earnings recession for the non-tech industries while we had an earnings recovery emerge for tech, specifically concentrated inside the S&P 500, given that it's a market-cap-weighted index, and this is the single biggest sector. Even before that earnings recovery emerged, tech obviously was the single biggest sector in the S&P 500. But as that recovery emerged for tech, it only amplified the market-cap concentration of the index. Now, and really over the course of this has been happening over the last couple of quarters, but very quietly, the rest of the index outside of tech has been staging something of an earnings recovery. It's not comprehensive across sectors. As we just mentioned, energy has been a bit of a laggard and remains something of a disappointment. But sectors like financials and industrials are also recording a very rapid recovery in growth. Financials, as a good example, is one of the highlights of the fourth-quarter earnings season so far, producing double the pace of earnings growth as anticipated. Both of these sectors had not been particularly good leaders and indeed were suffering from earnings weaknesses over much of the last two years. So, I think as you see this play out, the result is probably some rationalization of this capitalization extreme or the sensitivity in the broader market-cap-weighted index to the extremes of tech. It can manifest itself—and we've talked about this before, I think, Jim—and that is, it can manifest itself in a couple of ways. I think many people get a bit worried and extrapolate those kinds of statements to be, "Ah, tech is going to crash." But really, what could happen is tech just merely loses leadership, maybe continues to participate but doesn't lead anymore in the equity market. That's what we've seen, really, since June of 2024. Very quietly, the tech sector actually peaked in relative performance all the way back in June of 2024 and, in comparison to the rest of the S&P 500, has merely traded in a sideways pattern, while we've seen other sectors and stocks emerge as new potential leadership on the index. In particular, with financials really starting to gather a bit of momentum here.
Jim Puplava:
What about, Gina, the impact of index funds? The vast majority of investors and advisors are putting money into the index. So, every time you put money into an index fund, you put a dollar in, 30 cents goes to the Mag 7.
Gina Martin Adams:
Yeah, I think that there are a lot of folks that like to extrapolate that to suggest that means, over time, the market-cap concentration gets worse. I challenge that because if that were really the case, then why was tech a massive loss leader in 2022, as an example? We still had index funds gathering share throughout most of the last 10 years, and yet tech also became a loss leader at times. Also, there were still people putting money into index funds over the course of 2024, and yet tech became an underperformer relative to the market in the second half of 2024. So, it's not all index funds. I do think that certainly if you're buying an S&P 500 index fund or if you're buying an ETF benchmarked to the S&P 500, you are getting exposure to the Mag 7, and you are amplifying that trend. But it's not the only game in town when we look at ETF evolution. As a matter of fact, the fastest-growing category of ETFs is actually active ETFs, not necessarily index funds or passive benchmarks anymore. So, I think that this is more of a mixed picture than many people want to believe. But you do want to analyze your investment portfolio to the degree that you do own the index. You are very much overweighted to the Mag 7 right now.
Jim Puplava:
I want to talk about something. You know, after the election, the market took off with the euphoria over a Trump victory. But you wrote a piece about how, actually, it is under Democratic presidents that the market has fared far better. I think, what is it, 9.1% since 1931? It was 13.3 under Obama, 15.9 under Clinton. So, it's almost 300 basis points of outperformance under a Democratic president versus a Republican. Talk about that.
Gina Martin Adams:
Yeah, it's very interesting because I think every party wants to take credit for the equity market when it's going up and wants to shove off attention to the equity market when it's going down. But the reality is—and we wrote about this in October—the market tends to rally on the relief of the election no matter who gets elected. It's just, finally, we're past it, we have some certainty, we know who was elected. If you look at when Biden was elected back in 2020, you saw a very similar performance emerge in November. The other thing to consider is, you know, November and December basically offset one another. December was a really rough month. So, I do think that we tend to extrapolate a lot based upon political party, and you hear the loudest voices based upon the political party that gets elected into office when the market rallies after the election. But if you look longer term, yeah, the evidence is clear. I think the reasons why the Republican Party appears to have underperformed, at least since World War II, is really twofold. It's Nixon and Bush, where those two presidents presided over pretty material corrections in the equity market, the first of which, the Nixon experience, of course, was our stagflationary experience. There were some pretty significant policy errors in that period of time, monetary and fiscal policy, and then the Bush era, which was, of course, the deflation of the tech bubble. Sometimes, I think, frankly, a lot of this extrapolation of policymaking's impact on the market is a bit tenuous at best. Clearly, we know that the equity market trades on earnings growth, and to the degree that policymakers are impacting earnings growth and/or monetary policy outcomes, then that can have significant effects on the equity market. But the president is very visible, and so it's natural human nature to try to attribute movements in equities to presidential statements or policy statements. What I will say is really interesting about this most recent election is just how much investors do appear to have tied their investment strategy to some degree on the notion that politics become policies. So, what I mean by that is we run a bunch of thematic indices in our team, and we did see major distortions emerge in thematic investing post-election, with, in particular, the crypto plays in the index just absolutely surging to the moon, whereas plays like solar just got creamed after the election. So, there is some implied certainty in equity market pricing that campaign promises actually become real policies. It's not across the board, without a doubt, but I think if you work through the nuance, there is a little bit of expectation that we really will see policy change in 2025. So, we're certainly on guard for that to potentially either really disappoint expectations or prove the equity market was correct in anticipating changes.
Jim Puplava:
And speaking of policy changes, let's talk about tariffs and a possible trade war because it could impact US companies. Because when tariffs are put on, the companies pay the tariffs, and it's a question of whether they pass that on to the consumer or absorb it. What could tariffs do for, let's say, the S&P 500 companies?
Gina Martin Adams:
Yeah, I think that this is really not well understood at all. And it's very difficult because I do think that tariffs impact each company, each industry, each sector, and each market quite differently over the course of 2025, depending on if we actually see any strong tariff changes. But if you really work through the gymnastics of how tariffs impact companies, it is through the margin lines predominantly. And we saw this emerge in 2018, which is the last really representative example of major tariff changes on the index. And I think it's just important to keep in mind that while tariffs are targeted at economies generally, the companies actually pay the tariffs. And the vast majority of imports into the United States are done through multinational organizations, which are many of our biggest public companies. So, we're very much on guard for the US multinational companies to experience the greatest volatility as a result of tariffs if they do emerge. I think that there's a lot of conversation around tariffs ultimately impacting the consumer. But if you look at how tariffs manifested themselves in 2018, the vast majority of the tariffs were actually paid through company margin compression. And into the second half of 2018, we saw a pretty material slowdown in earnings. We saw a 20% correction in stocks. It was certainly not all due to tariffs, but I do think that tariffs played a significant role in creating a pretty significant slowdown in earnings trends for the index in that period. So, this is something we want to watch pretty carefully, as the reality is, in an environment where we're going to put a heavy cost on importing products, in today's world of very specialized supply chains and very complex global integration, US multinationals have really carved that path in a lot of ways and are very sensitive to changes in tariff policy and trade policy perpetuated by the US government. So, we haven't seen a whole lot of action yet, right? A 10% tariff on China and some nuanced tariffs on the metals industry, I don't think, are material actions that are going to impact the outlook for stocks. But some of the threats that are out there could be very impactful and most impactful, potentially, on US multinational companies, which means the S&P 500 may be the primary target ultimately of these tariffs.
Jim Puplava:
And another issue related to tariffs: What about the US dollar? A rising dollar could also impact earnings.
Gina Martin Adams:
Yeah, I think this is an excellent point, something we've been talking a lot about, especially since December. The dollar, from its September lows, ripped about 10%. It's off of that level now, so we're getting a little bit of reprieve from the dollar. But 10% moves in the dollar have historically led to some form of earnings disruptions for multinationals as well. It doesn't necessarily mean earnings turnover. Usually, you have to have a much stronger acceleration in the dollar before you get some very big earnings risk emerging. Notably, in the last two earnings recessions on the index, I should clarify, the dollar did rip 25% in each of those periods. So, we're on guard for something like that. If the dollar does move precipitously higher, it could create major earnings distress. But at a 10% gain, you're looking at the likelihood that, by the second or third quarter of next year at least, selected multinational companies will probably struggle to account for that dollar gain unless non-domestic economies pick up revenue growth very quickly, which is certainly a possibility. You never know how much non-domestic economies can produce some sort of recovery. Certainly, non-domestic economies around the world have been something of a disappointment over the last couple of years. So, maybe there's some upside growth that emerges there that offsets the dollar risk. But we are watching the dollar pretty closely at this point in time.
Jim Puplava:
I want to circle back to tech for a minute. We saw the announcement of Deep Seek. I think Nvidia dropped about 17% in a single day. What risk does that pose to the market, especially the Mag 7?
Gina Martin Adams:
Yeah, great question, and I do think that this is highly relevant because we now, in 2025, face a new reality when it comes to AI development across the world. I think we had been making a presumption prior to 2025 that the US was pretty much the only game in town here—not the only game, but at least a very strong leader. We had significant pricing power embedded in expectations. We were clearly going to spend to the beat of the band in order to try to implement AI across industries. These are the kinds of presumptions that seem to be in the market now with Deep Seek. The way that I see it is we're just now questioning how much of those presumptions are reality in an environment where, in truth, the competition is global. In truth, China has done a significant degree of development and is in this game as well. It's not just US providers, but probably globally there are competitive options out there. And that will mean, most likely, some degree of margin pressure that was not anticipated at the start of this year starts to emerge in tech. Now, this is interesting because, again—and I've said this probably too many times not to beat a dead horse or anything—but tech peaked in the middle of 2024 already, right? Nvidia peaked. That stock has been struggling to sustain those peak levels since the middle of 2024. It's been, you know, back and forth, certainly still trading near those highs despite several disruptions, but it's been hard for this group at large to continue to move forward. So, we were already in a process of at least some degree of adjustment. I think this news just amplifies that process more. We've got to readjust our expectations that this is just an easy win for certain select players. As we develop going forward, more competition will come in, pricing power will probably diminish, and we have to really question our assumptions about how much we can get out of the AI trade. And I just think that's going to be one of the themes that continues throughout 2025. Deep Seek was probably one warning that maybe our assumptions were a little bit too optimistic or ambitious, and we just need to right-size those assumptions for a new reality.
Jim Puplava:
I want to move on to another sector that has not done well last year, and that's the healthcare sector. A lot of these healthcare stocks have been beaten down, and if you look at where they might be, we might be starting another upcycle in earnings. I'd like to get your take there. I know that there was a sell-off with the nomination of RFK. In fact, on the day you and I are speaking, I think there's supposed to be voting on his position. What's your take on healthcare? It seems to me it's a standout sector right now.
Gina Martin Adams:
Yeah, it's a standout sector in our scorecards as well. If you look at healthcare, really awful performance from the healthcare sector's peak in August of 2024 right through to the December low, mainly toward the end of December last year, and it's been on a rip-roaring recovery rally up until last week. February 5th, I believe, was the peak in healthcare performance, and that rally has been, I think, stimulated by a couple of things. The first is healthcare stocks just got to a point of extraordinarily cheap levels relative to the rest of the index. It's very inexpensive on any methodology that we use. When we think about relative sector methodology, it's by far one of the cheapest in the S&P 500. You can add into that cheapness the reality that the earnings trend for healthcare is likely to improve into 2025, and you've got some pace for healthcare. I do think that healthcare is quite sensitive to headline risk, and that is just going to be a reality. As a healthcare investor, you're going to be sensitive to what's happening with headlines regarding spending, and certainly, there's a lot of volatility there, and it's just going to be part of life in 2025. But the fundamentals are really quite strong. I think what could really help healthcare, frankly, is an improvement in deal activity. This is a space that, you know, kind of desperately needs some deal activity. It tends to be smaller-cap deals that get done, and that would very much benefit the Russell. But if we can get some recovery in deal activity and some stability in earnings growth, that can go a long way to improve prospects for the healthcare sector. But you do have to absorb the policy risk, and I think that is highly unpredictable at this time. We really don't have a sense of where policy is going on healthcare. So, certainly, that's going to remain a bit of a drag on valuations. But the framework fundamentally is very, very sound for this segment.
Jim Puplava:
I want to bring up something that's kind of unusual, and I want to bring up the subject of gold, which is hitting new records. Typically, when you have rising interest rates or a rising dollar, that is not good for gold. But there's almost like a divergence now with those two things. We're still seeing gold over 2900. Some are saying that 3000 is next. What's your take on gold?
Gina Martin Adams:
Gold, yeah. I mean, I think that there is a class of investors that views gold as a very defensive asset. There's also a segment of investors that's concerned about the long-term outlook for inflation, considering especially the spending priorities of the US government and the sustainability of debt loads. Those things have allowed for some flight to gold. And I mean, just from a technical perspective, this has absolutely been the trade so far. Throughout 2024, gold was just on an absolute rip higher once it broke out of its 2023 range-bound trade. It's been off to the races ever since. So, I don't usually compare this asset class to stocks. I think it has its own segment of investors. But nonetheless, the signals may be worthwhile, and certainly, that investor group is seizing on very strong technical conditions along with a potential cue from the inflation numbers that our deceleration in inflation is past and some concern about the sustainability of debt and the long-term implications that may have for the US Treasury as well as the economy and the US.
Jim Puplava:
So, in summary, if we're looking at how 2025 may play out, I think the big story, as you alluded to earlier, is the return of, let's say, the rest of the S&P, the other 493 stocks, the unweighted index versus the index.
Gina Martin Adams:
Yeah, I think that's one of the big stories, without a doubt, and frankly, I think this has been the story since the middle of 2024, or it's been quietly playing out because there is still a psychological extreme captivation with the Mag 7. But that group's been trending sideways as the rest of the index—and definitely some of those stocks are still working, but others are not. But the rest of the index is starting to make up a little bit of lost ground versus that much-beloved segment so far for the last six months and change. And I think that may continue to be the story, at least in the near term.
Jim Puplava:
All right. Well, listen, Gina, if our listeners would like to follow you, I know you're on X and on LinkedIn. Is that the best way?
Gina Martin Adams:
Sure, absolutely. Unless you have a Bloomberg terminal, then, of course, you can contact me directly on the Bloomberg terminal. Our page on the terminal is BI space S T O X go—BI STOCKS GO. You can find us there. Or if you don't have a Bloomberg terminal, then you are more than welcome to contact me on LinkedIn. And actually, I am Gina Martin Adams in both locations.
Jim Puplava:
All right. Well, listen, Gina, stay warm and thanks for coming on the program. Hope to talk to you once again.
Gina Martin Adams:
Okay, thank you. Thanks for having me once again.
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