The most important Latin phrase in investing 📜

Plus a charted review of the macro crosscurrents 🔀

Feb 16, 2025

📈The stock market rallied last week, with the S&P 500 rising 1.5% to close at 6,114.63. It’s now up 4% year to date and up 70.9% from its October 12, 2022 closing low of 3,577.03. For more on market moves, read: Investing in the stock market is an unpleasant process 📉

Almost every day, we hear about economic data, financial news, a policy move, a geopolitical event, or some other development that presents a new headwind to the stock market. Rising inflation, higher interest rates, natural disasters, tariffs, war breaking out between our trading partners, viral outbreaks, and so on.

Any of these challenges could hurt business activity or reduce an investor’s appetite to take risk in the stock market.

But as history — including recent history — has taught us, it’s possible for the economy to flourish and the stock market to rise despite emerging headwinds.

These counterintuitive outcomes can often be explained by the most important Latin phrase in investing: Ceteris paribus.

All else equal 🧐

Ceteris paribus roughly translates to “all else equal” or “other things held constant.”

It’s a caveat analysts use when they are examining and discussing the effects of a variable assuming nothing else is changing.

For example: Rising oil prices, ceteris paribus, mean lower earnings because of higher energy costs.

Ceteris paribus gets you clean and simple explanations.

Unfortunately, the world is complicated. And all else is never equal.

What if those higher oil prices are the result of stronger demand from a hotter-than-expected economic activity? This could mean revenue for your business is growing faster than planned, which could more than offset your higher energy costs, which in turn means your earnings are higher.

This is how I’ve been discussing evolving expectations for Fed rate cuts for more than a year. Fewer rate cuts, ceteris paribus, may be considered hawkish for stocks. But these lowered expectations have come amid better-than-expected economic data, which has fueled earnings growth and sent stock prices up and to the right.

TKer subscribers have seen this language used frequently when we’ve quoted analysts addressing emerging challenges (emphasis added):

“In general, we estimate every 10% rise in the USD translates to a 3% hit to EPS, all else equal.” - BofA, January 2025
“We estimate that each 1 percentage point change in the statutory domestic tax rate would shift S&P 500 EPS by slightly less than 1%, or approximately $2 of 2025 S&P 500 EPS, all else equal.” - Goldman Sachs, Sept. 2024
“Through the lens of our EPS model a 10% rise in oil would boost S&P 500 EPS by roughly 1%, all else equal.” - Goldman Sachs, April 2024
“[C]omparing today's valuation to its prior multiples may be more punitive in that today's market is more asset-light, labor-light and debt-light than prior cycles and Corporate America's renewed focus on efficiency argues for a lower equity risk premium all else equal.“ - BofA, October, 2024
“The S&P 500 effective tax rate would need to rise from 20% today to roughly 28% in 20 years to offset the potential earnings boost from AI adoption, all else equal.” - Goldman Sachs, June 2023
“The impact from a 1% buyback tax is two-fold: 1) reduction in earnings from paying the new tax; 2) reduction in overall gross buybacks (all else equal) to compensate for the tax and thus a smaller reduction in ‘S’ within EPS.” - JPMorgan, September 2022

To be clear, ceteris paribus also means there could be other negative developments that aren’t being considered, not just positive ones. Again, the world is complicated.

But in recent months and years, ceteris paribus has frequently been a reminder that even though we are witnessing challenges emerge, there’s also a lot of things we’re not talking about that could go right.

I’ve made this point a couple times. (See here and here.)

Notably, see the April 10, 2022 TKer: The wrong question — and the right one — to ask about earnings headwinds 💬. From that newsletter:

When a new headwind emerges, investors probably think to themselves: How will this hurt the earnings of the companies I’m invested in?
… The problem is we’re asking the wrong question.
… The right question is: Can the companies I’m invested in deliver on earnings?
It’s similar to the question above, but it broadens the scope of the inquiry to consider more than just the negative impacts of just the unfavorable developments.

Simply put, investors should not be thinking about the effects of some development in isolation. It needs to be considered in the context of everything that affects earnings. Because for investors, what ultimately matters is whether earnings will keep going up.

Recent developments 🌎

There’s been lots of news about new tariffs and the potential for more tariffs down the road. And tariffs are almost universally considered negative for all of the economies involved.

It’s a big deal, especially since many companies and analysts have yet to factor in the impact of tariffs into their earnings forecasts.

“We estimate that 25% tariﬀs on Canada and Mexico plus 10% incremental tariﬀs on China translates into a 2% hit to EPS, all else equal (1.7% from Canada & Mexico and 0.3% from China),” BofA’s Savita Subramanian wrote in a Feb. 9 note.

As Subramanian’s use of “all else equal” suggests, the situation is more complicated than simply calculating the cost of tariffs when applied to recent trade data. The ultimate effects could be much worse! And we’re not even addressing all of the other tariffs that have been threatened in recent days.

But we also know many companies have actively taken steps to blunt the incremental costs of tariffs and work around potential disruptions to global supply chains.

We also know that companies have been reporting earnings that have exceeded expectations.

As we assess the effects of tariffs and other challenges that may emerge, we should also be vigilant of the positive things going on that may help keep earnings growing — which in turn would support stock prices going higher.

Related from TKer:

The wrong question — and the right one — to ask about earnings headwinds 💬
Three types of 'facts' that can lead you astray 🗺️
9 evergreen investor lessons from 2024 📜
For the stock market, it's not bad unless it's bad for earnings 💰
The business community's 2-part plan for addressing tariffs 📋
10 truths about the stock market 📈

Review of the macro crosscurrents 🔀

There were several notable data points and macroeconomic developments since our last review:

🛍️ Shopping ticks lower from record levels. Retail sales declined 0.9% in January to $723.9 billion.

Most categories fell during the period.

Wildfires in Los Angeles and harsh winter weather in other parts of the country may have disrupted January retail activity.

For more on consumer spending, read: Americans have money, and they're spending it 🛍️ and 9 once-hot economic charts that cooled 📉

💳 Card spending data is holding up. From JPMorgan: “As of 07 Feb 2025, our Chase Consumer Card spending data (unadjusted) was 3.1% above the same day last year. Based on the Chase Consumer Card data through 07 Feb 2025, our estimate of the US Census February control measure of retail sales m/m is 0.48%.”

For more on the consumer, read: Americans have money, and they're spending it 🛍️

👎 Inflation ticks up. The Consumer Price Index (CPI) in January was up 3.0% from a year ago, up from the 2.9% rate in December. Adjusted for food and energy prices, core CPI was up 3.3%, up from the prior month’s 3.2% level.

On a month-over-month basis, CPI was up 0.5% and core CPI was up 0.4%.

For more on inflation, read: The end of the inflation crisis 🎈and The Fed closes a chapter with a rate cut ✂️

👍 Inflation expectations remain cool. From the New York Fed’s January Survey of Consumer Expectations: “Median inflation expectations were unchanged at 3.0% at both the one- and three-year-ahead horizons. Median five-year-ahead inflation expectations rose by 0.3 percentage point to 3.0% in January. This increase was driven primarily by respondents with a high-school education or less.”

The introduction of tariffs as proposed by president-elect Donald Trump would be inflationary. For more, read: 5 outstanding issues as President Trump threatens the world with tariffs 😬

🏛️ Powell says Fed isn’t in a “hurry.” From Fed Chair Jerome Powell’s semiannual monetary policy report: “With our policy stance now significantly less restrictive than it had been and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance. We know that reducing policy restraint too fast or too much could hinder progress on inflation. At the same time, reducing policy restraint too slowly or too little could unduly weaken economic activity and employment. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the FOMC will assess incoming data, the evolving outlook, and the balance of risks.“

For more on the state of monetary policy and what it means for markets, read: 'How many times will the Fed cut rates?' is not the right question for stock market investors 🔪

⛽️ Gas prices tick up. From AAA: “Amid the threat of tariffs, the national average for a gallon of gas ticked up two cents from last week to $3.13. According to new data from the Energy Information Administration (EIA), gasoline demand increased from 8.30 million b/d last week to 8.32. Total domestic gasoline supply rose from 248.9 million barrels to 251.1, while gasoline production decreased last week, averaging 9.2 million barrels per day.”

For more on energy prices, read: Higher oil prices meant something different in the past 🛢️

💼 Unemployment claims fall. Initial claims for unemployment benefits fell to 213,000 during the week ending February 8, down from 220,000 the week prior. This metric continues to be at levels historically associated with economic growth.

For more on the labor market, read: The labor market is cooling 💼

🏠 Mortgage rates tick lower. According to Freddie Mac, the average 30-year fixed-rate mortgage declined to 6.87% from 6.89% last week. From Freddie Mac: “The 30-year fixed-rate mortgage continued to inch down this week, reaching its lowest level thus far in 2025. Recent mortgage rate stability is benefitting potential buyers, as purchase demand is stronger than this time last year. This is an indication that a thaw in buyer activity could be on the horizon.”

There are 147 million housing units in the U.S., of which 86.6 million are owner-occupied and 34 million (or 40%) of which are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to movements in home prices or mortgage rates.

For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖

👍 Small business optimism cools after huge spike. From the NFIB’s January Small Business Optimism Index report: “Small business owners greeted the new year with a surge in optimism. Seventeen percent (seasonally adjusted) now view the current period as a good time to expand substantially, up from just 4 percent a few months ago. A seasonally adjusted net 20 percent expect real sales gains compared to a net negative 18 percent a few months earlier. Better business conditions were expected by a seasonally adjusted net 47 percent, up from a net negative 13 percent just four months ago (net of negative responses). Reports of unfilled job openings and plans to hire to fill them remained historically high. Owners have been unsuccessful filling them over the past four years, finding few qualified applicants while government related hiring soared. Tough competition.”

For more on the state of sentiment, read: The post-election sentiment sea change 🔃 and Beware how your politics distort how you perceive economic realities 😵‍💫

🛠️ Industrial activity ticks higher. Industrial production activity in January rose 0.5% from the prior month. Manufacturing output declined 0.1%.

For more on economic activity cooling, read: The US economy is now less ‘coiled’ 📈

🏢 Offices remain relatively empty. From Kastle Systems: “Peak day office occupancy was 63.3% on Tuesday last week, down one tenth of a point from the previous week. Austin saw a 2.7-point increase in Tuesday occupancy, up to 71%, and a 7.5-point increase in Wednesday occupancy, up to 71.9%. The average low was on Friday at 35.8%, down nearly a full point from last week.”

For more on office occupancy, read: This stat about offices reminds us things are far from normal 🏢

📈 Near-term GDP growth estimates remain positive. The Atlanta Fed’s GDPNow model sees real GDP growth climbing at a 2.3% rate in Q1.

For more on the economy, read: 9 once-hot economic charts that cooled 📉

Putting it all together 🤔

The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.

Demand for goods and services is positive, and the economy continues to grow. At the same time, economic growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like excess job openings have faded.

To be clear: The economy remains very healthy, supported by strong consumer and business balance sheets. Job creation remains positive. And the Federal Reserve — having resolved the inflation crisis — has shifted its focus toward supporting the labor market.

We are in an odd period given that the hard economic data has decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continue to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.

Analysts expect the U.S. stock market could outperform the U.S. economy, thanks largely due to positive operating leverage. Since the pandemic, companies have adjusted their cost structures aggressively. This has come with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.

Of course, this does not mean we should get complacent. There will always be risks to worry about — such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, cyber attacks, etc. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.

There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect to experience as they build wealth in the markets. Always keep your stock market seat belts fastened.

For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t be able to overcome over time. The long game remains undefeated, and it’s a streak long-term investors can expect to continue.

For more on how the macro story is evolving, check out the previous review of the macro crosscurrents »

Key insights about the stock market 📈

Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.

10 truths about the stock market 📈

The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.

The makeup of the S&P 500 is constantly changing 🔀

Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.

(Source: S&P Dow Jones indices via TKer)

The key driver of stock prices: Earnings💰

For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings have a very tight statistical relationship.

Stomach-churning stock market sell-offs are normal🎢

Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.

High and rising interest rates don't spell doom for stocks👍

Generally speaking, rising interest rates are not welcome news for the economy and the stock market. They represent higher financing costs for businesses and consumers. All other things being equal, rising rates represent a hindrance to growth. However, the world is complicated, and this narrative comes with a lot of nuance. One big counterintuitive piece to this narrative is that historically, stocks have actually performed well during periods of rising interest rates.

How the stock market performed around recessions 📉📈

Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.

In the stock market, time pays ⏳

Since 1928, the S&P 500 generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.

What a strong dollar means for stocks 👑

While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.

Economy ≠ Stock Market 🤷‍♂️

The stock market sorta reflects the economy. But also, not really. The S&P 500 is more about the manufacture and sale of goods. U.S. GDP is more about providing services.

Stanley Druckenmiller's No. 1 piece of advice for novice investors 🧐

…you don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.

Peter Lynch made a remarkably prescient market observation in 1994 🎯

Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.

Warren Buffett's 'fourth law of motion' 📉

Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.

Most pros can’t beat the market 🥊

According to S&P Dow Jones Indices (SPDJI), 59.7% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2023. As you stretch the time horizon, the numbers get even more dismal. Over a three-year period, 79.8% underperformed. Over a 10-year period, 87.4% underperformed. And over a 20-year period, 93% underperformed. This 2023 performance follows 13 consecutive years in which the majority of fund managers in this category have lagged the index.

Proof that 'past performance is no guarantee of future results' 📊

S&P Dow Jones Indices found that funds beat their benchmark in a given year are rarely able to continue outperforming in subsequent years. For example, 334 large-cap equity funds were in the top half of performance in 2021. Of those funds, 58.7% came in the top half again in 2022. But just 6.9% were able to extend that streak through 2023. If you set the bar even higher and consider those in the top quartile of performance, just 20.1% of 164 large-cap funds remained in the top quartile in 2022. No large-cap funds were able to stay in the top quartile for the three consecutive years ending in 2023.

The odds are stacked against stock pickers 🎲

Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. In fact, most professional stock pickers aren’t able to do this on a consistent basis. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 24% of the stocks in the S&P 500 outperformed the average stock’s return from 2000 to 2022. Over this period, the average return on an S&P 500 stock was 390%, while the median stock rose by just 93%.

📈 TKer by Sam Ro

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