8 chaotic scatterplots โ and the bullish quality they all share ๐
Plus a charted review of the macro crosscurrents ๐
๐The stock market rallied last week with the S&P 500 rising 2.9% to end at 5,996.66. The index is up 1.9% year to date and up 67.6% from its October 12, 2022 closing low of 3,577.03. For more on recent market moves, read: Investing in the stock market is an unpleasant process ๐
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Analysts often test the relationship between two variables by plotting a sample of observations on a chart and then conducting a linear regression. In this process, one draws a line of best fit somewhere in the scatterplot and calculates the R-squared โ the degree to which that line explains the relationship between those two variables.
Simply put, the R-squared tells us if changes in one variable will tell us anything about how another variable will change.
Sometimes, the analysis yields a very high R-squared โ like when you plot stock prices against earnings.
Sometimes, the R-squared is very low โ like what youโre about to see below.
This type of statistical analysis is important in markets because what you might intuit about the relationship between two variables doesnโt always come through in practice.
Strategistsโ bullishness isnโt a contrarian indicator ๐
Almost all major Wall Street strategists expect the S&P 500 to generate a high-single digit to low-double digit return in 2025.
If everyone thinks the market will do well, does that mean weโre actually more likely to be disappointed?
Bespoke Investment Group reviewed the past 25 yearsโ worth of data and found that the magnitude of strategistsโ one-year forecasts had little relationship with what the market actually did.
โ[T]here is absolutely zero correlation between strategist targets and what the market does in the year ahead,โ the analysts wrote on Dec. 24. โThe scatter chart below shows the r-squared between the two, which is 0.0. You can't get less correlated than that! And what happens when strategists are bullish and expecting a double-digit increase like they are for 2025? Itโs a coin flip.โ

Wall Street strategistsโ bullishness wonโt help you nail the next yearโs return.
For more on strategistsโ targets, read: A better way of thinking about Wall Street's year-end price targets ๐บ๏ธ and A familiar pattern is emerging in Wall Street's 2025 stock market targets
High market concentration isnโt a sell signal ๐
Every day, someone is sounding the alarm on how the stock marketโs value and performance is due to a handful of massive companies.
However, this market concentration isnโt unprecedented. Furthermore, itโs hard to argue that itโs a sign of impending market doom.
Goldman Sachs analysts explain: โThe top five stocks in the S&P 500 account for 29% of the indexโs market capitalization. This level is the highest since 1980. The stocks are, in order of market capitalization, Apple, Nvidia, Microsoft, Amazon and Alphabet. As can be seen in Exhibit 58, the level of concentration has no bearing on returns over the next 12 months. The R-squared, which explains the variance in equity returns attributed to the level of concentration, is negligible, at 0.04%. The results are the same if one uses alternative measures of concentration, such as the top 10 stocks.โ

High market concentration is notable, but itโs not a bearish trading signal.
For more on market concentration, read: The FAAMGs are more than just five stocks ๐คจ and Increased market concentration isnโt a sign of trouble ๐
A strengthening dollar doesnโt mean earnings will go down ๐
When the dollar appreciates against other currencies, the value of sales generated abroad become less valuable in the U.S. This is why dollar strength is considered a headwind for multinational American companies that do a lot of business outside of the country.
But the earnings of the S&P 500, which generates about 41% of sales abroad, are driven by more than just currency fluctuations.
Thatโs why when Morgan Stanleyโs Michael Wilson ran the numbers for the S&P, it wasnโt obvious that dollar strength would be a major drag to earnings.
โ[I]ndex-level EPS growth exhibits a weak statistical relationship relative to the dollar's rate of change,โ Wilson observed.

Currency fluctuations can affect earnings, but itโs rarely the dominant driver of the stock marketโs aggregate earnings.
For more, read: Perspective on the U.S. dollar 'headwind' ๐ต
The first Fed rate cut isnโt obviously bullish or bearish ๐
One of the hottest debates among market participants today is about the timing of rate cuts from the Federal Reserve.
All other things being equal, a rate cut is generally considered a dovish development.
However, Fed policy decisions occur in the context of a very complex economy, which usually has a greater impact on stock prices. This means prices can move regardless of rate cuts, rate hikes, or no move on rates.
Last September, BofAโs Savita Subramanian examined the relationship between stock price performance and an initial Fed rate cut. From her research note: โ[W]e found that S&P 500 returns in the months leading up to the first rate cut did not have a consistent relationship with 12m fwd returns (Exhibit 15-Exhibit 16). Similarly, how close the S&P was to its 52-week high was also not predictive (Exhibit 17). When the Fed first cut rates in 1995 (a so๏ฌ -landing), TTM S&P returns were +26%, the S&P was within 1% of its all-time high, and the index still returned 23% in the NTM.โ
Recent market performance and initial rate cuts alone wonโt tell us where the market is headed.
According to Ritholtz Wealth Managementโs Callie Cox, a pattern emerges depending on whether the economy goes into recession in the 12 months following an initial rate cut. Again, itโs a reminder that there are often bigger forces at play than the Fed alone.
For more on what Fed policy means for stocks, read: 'How many times will the Fed cut rates?' is not the right question for stock market investors ๐ช and A blunt message for those asking what Fed rate cuts mean for stocks โ๏ธ
Valuation is a terrible timing tool ๐
The price-to-earnings (P/E) ratio may help us understand if a security is expensive or cheap relative to history.
But it wonโt tell us where prices are headed over the next year.
โ[T]he correlation between the S&P 500's forward P/E and subsequent one-year performance โ going back to the 1950s โ is -0.11, which means there is virtually no relationship,โ Schwabโs Liz Ann Sonders and Kevin Gordon observed.

Historical data suggests P/E ratios may tell us something about long-term returns. But they appear to tell us almost nothing about near-term returns.
For more, read: A high P/E is not a stock market sell signal โ ๏ธ
Good luck guessing next yearโs stock market return ๐
While it may be the case the stock market usually goes up, how much it goes up in a given year can be unpredictable.
Also, โusuallyโ does not mean โalways,โ which is to say the market also goes down sometimes. And it is effectively impossible to accurately predict when those down years will happen.
Unfortunately, past returns arenโt particularly helpful in predicting future returns either.
โReturns are all over the map,โ Ritholtz Wealth Managementโs Ben Carlson wrote.

Sometimes the stock market goes up a little. Sometimes a lot. Sometimes it goes down. Rarely will you get an average return.
For more on annual returns, read: An extraordinarily average stock market stat ๐
Rule No. 1 of analyzing the economy ๐
The point of this discussion is to remind you to never count on the signal of a single metric when trying to understand the direction of another metric. Thatโs rule No. 1 of analyzing the economy using data.
The economy and the markets are complex, and the only way to understand them is to consider more than a few metrics as you piece together the mosaic of crosscurrents that define them.
For more on this, read: Rule No. 1 of analyzing the economy ๐
Something bullish worth noting ๐
If you take a closer look at all these charts, youโll notice they all slant bullishly. Historically, earnings have been more likely to grow than contract. And stock market price performance has been far more likely to be positive than negative.
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More from TKer:
Review of the macro crosscurrents ๐
There were several notable data points and macroeconomic developments since our last review:
๐๏ธ Shopping rises to new record level. Retail sales increased 0.4% in December to a record $729.2 billion.

Growth was led by sporting goods, furniture, gas stations, grocery, cars and parts, and electronics.

For more on the consumer, read: The state of the American consumer in a single quote ๐ and Americans have money, and they plan to spend it during the holidays ๐
๐ณ Card spending data is holding up. From JPMorgan: โAs of 09 Jan 2025, our Chase Consumer Card spending data (unadjusted) was 2.1% above the same day last year. Based on the Chase Consumer Card data through 09 Jan 2025, our estimate of the US Census January control measure of retail sales m/m is 0.64%.โ
From BofA: โTotal card spending per HH was down 0.8% y/y in the week ending Jan 11, according to BAC aggregated credit & debit card data. The South and Midwest saw large y/y declines in total card spending in the week ending Jan 11, likely due to the snowstorms. The LA wildfire impact seems to be more localized since total card spending growth in CA has only slowed modestly so far.โ
For more on the consumer, read: Americans have money, and they plan to spend it during the holidays ๐
๐ผ Unemployment claims tick up. Initial claims for unemployment benefits rose to 217,000 during the week ending January 11, up from 203,000 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 ๐ผ
๐ Inflation remains cool. The Consumer Price Index (CPI) in December was up 2.9% from a year ago, up from the 2.7% rate in November. Adjusted for food and energy prices, core CPI was up 3.2%, down from the prior monthโs 3.3% level.

On a month-over-month basis, CPI was up 0.4% and core CPI was up 0.3%.

If you annualize the six-month trend in the monthly figures โ a reflection of the short-term trend in prices โ core CPI climbed 3.2%.

For more on inflation, read: The end of the inflation crisis ๐and The Fed closes a chapter with a rate cut โ๏ธ
๐ Inflation expectations remain cool. From the New York Fedโs December Survey of Consumer Expectations: โMedian inflation expectations were unchanged at 3.0% at the one-year horizon, increased to 3.0% from 2.6% at the three-year horizon, and declined to 2.7% from 2.9% at the five-year horizon.โ

The introduction of tariffs as proposed by president-elect Donald Trump would be inflationary. For more, read: Wall Street agrees: Tariffs are bad ๐
โฝ๏ธ Gas prices rise. From AAA: โOil costs hovering around $80 a barrel have helped push the national average for a gallon of gas four cents higher since last week to $3.10. โฆAccording to new data from the Energy Information Administration (EIA), gasoline demand fell from 8.48 million b/d last week to 8.32. Meanwhile, total domestic gasoline stocks rose from 237.7 million barrels to 243.6, while gasoline production popped last week, averaging 9.3 million barrels daily.โ

For more on energy prices, read: Higher oil prices meant something different in the past ๐ข๏ธ
๐ Small business optimism jumps. The NFIBโs Small Business Optimism Index surged in December. From the reportโs commentary: โOptimism on Main Street continues to grow with the improved economic outlook following the election. Small business owners feel more certain and hopeful about the economic agenda of the new administration. Expectations for economic growth, lower inflation, and positive business conditions have increased in anticipation of pro-business policies and legislation in the new year.โ

Notably, the more sentiment-oriented โsoftโ components of the index continue to converge with the more tangible โhardโ components.

For more on the state of sentiment, read: The post-election sentiment sea change ๐ and Beware how your politics distort how you perceive economic realities ๐ตโ๐ซ
๐ Mortgage rates tick higher. According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 7.04%, up from 6.93% last week. From Freddie Mac: โMortgage rates ticked up for the fifth consecutive week and crossed seven percent for the first time since May of 2024. The underlying strength of the economy is contributing to this increase in rates.โ

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 ๐
๐ Homebuilder sentiment improved. From the NAHBโs Carl Harris: โBuilders are facing continued challenges for housing demand in the near-term, with mortgage rates up from near 6.1% in late September to above 6.9% today. Land is expensive and financing for private builders remains costly. However, there is hope that policymakers are taking the impact of regulatory hurdles seriously and will make improvements in 2025.โ

๐จ New home construction starts rise. Housing starts jumped 15.8% in December to an annualized rate of 1.49 million units, according to the Census Bureau. Building permits fell 0.7% to an annualized rate of 1.48 million units.

๐ข Offices remain relatively empty. From Kastle Systems: โPeak day office occupancy was 56.5% on Tuesday, up more than 37 points from the previous week as workers returned to work after the holidays. Chicago and New York rose more than 50 points on Tuesday to 67.9% and 65.4%, respectively, and most cities experienced double-digit occupancy increases nearly every day compared to the prior week. The average low was on Friday at 26.3%, up over 10 points from last week.โ

For more on office occupancy, read: This stat about offices reminds us things are far from normal ๐ข
๐ ๏ธ Industrial activity ticks higher. Industrial production activity in December rose 0.9% from the prior month. Manufacturing output rose 0.6%. From the Federal Reserve: โIn December, gains in the output of aircraft and parts contributed 0.2 percentage point to total IP growth following the resolution of a work stoppage at a major aircraft manufacturer.โ

For more on economic activity cooling, read: The US economy is now less โcoiledโ ๐
๐ Near-term GDP growth estimates remain positive. The Atlanta Fedโs GDPNow model sees real GDP growth climbing at a 3.0% rate in Q4.

For more on the economy, read: 9 once-hot economic charts that cooled ๐
Putting it all together ๐ค
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 โcoiledโ 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 โ having resolved the inflation crisis โ 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 investorโs 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 โ in the cooling economy โ is translating to robust earnings growth.
Of course, this does not mean we should get complacent. There will always be risks to worry about โ 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.
Thereโs 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, thereโs no reason to believe thereโll be a challenge that the economy and the markets wonโt be able to overcome over time. The long game remains undefeated, and itโs a streak long-term investors can expect to continue.
For more on how the macro story is evolving, check out the the previous TKer macro crosscurrents ยป
Key insights about the stock market ๐
Hereโs a roundup of some of TKerโs 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 ๐
The stock market can be an intimidating place: Itโs real money on the line, thereโs an overwhelming amount of information, and people have lost fortunes in it very quickly. But itโs 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 ๐
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 โ an index of 500 of the largest U.S. companies โ is anything but a static set of 500 stocks.

The key driver of stock prices: Earnings๐ฐ
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. Thatโs because long-term moves in a stock can ultimately be explained by the underlying companyโs 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 normal๐ข
Investors should always be mentally prepared for some big sell-offs in the stock market. Itโs 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 stocks๐
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 stocks performed when the yield curve inverted โ ๏ธ
Thereโve been lots of talk about the โyield curve inversion,โ with media outlets playing up that this bond market phenomenon may be signaling a recession. Admittedly, yield curve inversions have a pretty good track record of being followed by recessions, and recessions usually come with significant market sell-offs. But experts also caution against concluding that inverted yield curves are bulletproof leading indicators.
How the stock market performed around recessions ๐๐
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 โณ
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, youโll see that thereโs never been a period where the S&P 500 didnโt generate a positive return.

What a strong dollar means for stocks ๐
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, itโs a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.

Economy โ Stock Market ๐คทโโ๏ธ
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 ๐ง
โฆyou 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 theyโve 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 ๐ฏ
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. โฆ 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 yearsโฆ The next 500 points, the next 600 points โ I donโt know which way theyโll goโฆ Theyโll 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' ๐
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaacโs talents didnโt extend to investing: He lost a bundle in the South Sea Bubble, explaining later, โI can calculate the movement of the stars, but not the madness of men.โ 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 canโt beat the market ๐ฅ
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' ๐
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 ๐ฒ
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. In fact, most professional stock pickers arenโt able to do this on a consistent basis. One of the reasons for this is that most stocks donโt deliver above-average returns. According to S&P Dow Jones Indices, only 24% of the stocks in the S&P 500 outperformed the average stockโs 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%.

Sam, I wonder if the entire market structure has changed so much in the last 50 +/- years that the concentration metrics will just continue to skew toward fewer / bigger companies ? When I first started my career in early/mid 80's, compensation was largely commission based. It's now all about AUM and fees. Why steer someone toward risky / smaller investments, when you are going to make your 1.5% either way ? Just go with large equity indexes and mid / short duration bonds. Smaller companies were all about growing into big ones, now, with so much equity compensation, you're just looking for a sale, so you focus more on productivity than growth. I'm no expert, just trying to make sense of where things continue to head....best, bdp.