Small businesses upbeat

The National Federation of Independent Business (NFIB) released its latest Small Business Optimism Index on January 14, 2025, revealing a 3.4-point increase in December to 105.1—the highest since October 2018. This marks the second consecutive month the index has surpassed the 51-year average of 98, indicating growing confidence among small business owners. Notably, the Uncertainty Index declined by 12 points to 86, suggesting reduced apprehension about future business conditions.

• As we wrote about in our Trump 2.0 piece a month ago, the election could stoke animal spirits, creating tailwinds for economic activity
• Small businesses would logically be where we begin to see manifestations of this, given they are quicker to make adjustments than larger companies
• Small businesses also comprise roughly half of the economy
• Notably, a net 52% of small business owners expected the economy to improve, the highest reading since 1983
• However, a net 19% of small businesses reported labor quality as the single most important problem for their business
• Additionally, 11% of owners reported labor costs as their single most important problem, down from the highest reading of 13% in late 2021
• If labor continues to be tight, this would lead to wage hikes, which would lead to price inflation

Inflation within expectations

On January 15, 2025, the U.S. Bureau of Labor Statistics reported that the Consumer Price Index (CPI) rose by 0.4% in December, leading to a 2.9% year-over-year increase—the highest since July. Core CPI, which excludes volatile food and energy prices, increased by 0.2% month-over-month and 3.2% annually, indicating persistent underlying inflation. This data suggests that the Federal Reserve may be less inclined to implement rate cuts in the near future as inflation remains above the central bank's 2% target. Despite the inflation uptick, the stock market responded positively.

• Given inflation has inched higher recently, markets are again focused on it as a major driver of risk appetite
• While CPI is still almost 3% higher than last year, given it came in near expectations, the market took this as a positive
• The key issue is of course, whether or not the Fed can continue lowering interest rates this year
• The 10-year treasury yield fell on the back of the news, indicating marginally lower inflation expectations as well as more room for the Fed to cut in the future
• We still believe inflation is one of the most significant risks to stocks and other risk assets today

Banks blow-out earnings

This week, major U.S. banks reported strong fourth-quarter 2024 earnings, highlighting a robust financial sector performance. Goldman Sachs reported net revenues of $13.87 billion and net earnings of $4.11 billion for the fourth quarter of 2024, more than double last year. Morgan Stanley reported net revenues of $16.22 billion and net earnings of $3.71 billion for the fourth quarter of 2024. JPMorgan Chase's profit surged 50% to $4.81 per share, surpassing expectations, with revenues climbing 11% to $42.77 billion, driven by record figures in payments and asset management. Similarly, Bank of America's net profits more than doubled to $6.7 billion, fueled by a 44% increase in investment banking fees and a rise in loans.

• Similarly to small businesses, few sectors of the economy stood to gain from the second Trump administration than financial services
• Banks and financial services companies have been rallying given the administration's stance on de-regulation
• Coming into the election, as interest rates edged lower, companies came to market to refinance debt
• Post-election, banks experienced a surge of activity as companies began to prepare for 2025
• This activity can be seen in banks’ fourth quarter earnings as reported this week
• This trend will likely continue throughout 2025 and at least the first half of Trump’s first two years in office

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