Daily, we encounter various economic indicators, financial updates, policy changes, geopolitical events, and other situations that pose challenges to the stock market. Factors such as escalating interest rates, natural calamities, conflicts with trading partners, and viral outbreaks are among these hurdles.
Any of these issues could negatively impact business operations or diminish an investor’s willingness to engage in the stock market.
However, historical trends — including contemporary examples — demonstrate that the economy can thrive and stock values can rise despite emerging challenges.
These seemingly contradictory results can often be clarified by a pivotal Latin term in investing: Ceteris paribus.
Ceteris paribus translates to “all else being equal” or “other factors held constant.”
This phrase serves as a caution for analysts when discussing the impact of a variable while assuming that everything else remains unchanged.
For instance, rising oil prices, ceteris paribus, imply lower earnings due to increased energy costs.
But what if the higher oil prices stem from increased demand due to unexpected robust economic activity? This could indicate that your business’s revenue is growing faster than anticipated, potentially offsetting the higher energy expenses, resulting in increased earnings.
This scenario reflects evolving expectations regarding Fed rate adjustments. Fewer anticipated rate cuts, ceteris paribus, may seem unfavorable for stocks. However, these lowered expectations have been accompanied by better-than-expected economic data, propelling earnings growth and driving stock prices upward.
TKer subscribers have often seen such terminology used when we reference analysts discussing emerging challenges (emphasis added):
“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.” –
“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.” –
It’s important to note that ceteris paribus also implies that there could be other negative developments not taken into account, not just positive ones. Once again, the world is indeed complex.
Nevertheless, in recent months and years, ceteris paribus has frequently served as a reminder that despite emerging challenges, many factors can contribute positively that we may not be considering.
I’ve emphasized this point on multiple occasions. (See and.)
Notably, refer to the April 10, 2022, TKer: . From that newsletter:
When a new headwind arises, investors likely ponder: How will this impact the earnings of the companies I’m invested in?
… The challenge, however, lies in asking the wrong question.
… The correct question should be: Can the companies I’m invested in meet their earnings targets?
While similar to the previous inquiry, this question opens up the discussion to consider more than just the adverse effects of unfavorable developments.
Simply put, investors should refrain from evaluating the impact of any development in isolation. It must be assessed within the broader context of all factors that affect earnings. After all, for investors, .
President Donald Trump announces reciprocal tariffs, in Washington, DC, on February 13, 2025 as Commerce Secretary Howard Lutnick (R) looks on. (Photo by ANDREW CABALLERO-REYNOLDS/AFP via Getty Images) · ANDREW CABALLERO-REYNOLDS via Getty Images
Recent developments indicate a growing threat of tariffs, which could adversely affect all economies involved.
This issue is particularly significant, as numerous companies and analysts incorporate the effects of tariffs into their earnings predictions.
“Our analysis indicates that a 25% tariff on Canada and Mexico alongside 10% incremental tariffs on China would signify a 2% hit to EPS, all else being equal (1.7% from Canada & Mexico and 0.3% from China),” stated BofA’s Savita Subramanian in a note dated February 9.
Subramanian’s reference to “all else equal” underscores the situation’s complexity beyond merely assessing the cost of tariffs in relation to recent trade data. The actual consequences could be significantly more severe! Furthermore, we’re not even considering all the other tariffs threatened in recent days.
Additionally, many companies have strategies to mitigate the incremental costs of tariffs and adapt to potential disruptions in global supply chains.
Moreover, companies continue to report earnings that have been.
As we evaluate the ramifications of tariffs and other emerging challenges, we must also remain aware of the positive developments that may contribute to ongoing earnings growth — thereby supporting higher stock prices.
Several noteworthy data points and macroeconomic developments have emerged since our last update:
Retail spending declines from record highs. Retail sales decreased by 0.9% in January to $723.9 billion.
Sales dropped during the period.
Disruptions in other regions may have impacted January’s retail performance.
Card spending data remains stable. According to JPMorgan: “As of February 7, 2025, our Chase Consumer Card spending data (unadjusted) was 3.1% higher than the same day last year. Based on this data, we estimate the US Census February control measure of retail sales month-over-month at 0.48%.”
Inflation experiences a slight uptick. The Consumer Price Index (CPI) in January rose by 3.0% from the previous year, an increase from the 2.9% rate recorded in December. Core CPI, adjusted for food and energy prices, increased to 3.3%, up from 3.2% the prior month.
On a month-over-month basis, CPI rose by 0.5%, and core CPI increased by 0.4%.
Inflation expectations stay mild. According to the New York Fed: “Median inflation expectations remained unchanged at 3.0% for both the one-year and three-year forecasts. In January, median five-year inflation expectations increased by 0.3 percentage points to 3.0%. This rise was primarily attributed to respondents with a high-school education or lower.”
Powell indicates that the Fed is not in a rush. From comments made by Fed Chair Jerome Powell: “With our policy stance now significantly less restrictive than previously and the economy remaining robust, we do not need to hurry to adjust our policy approach. We recognize that making changes too rapidly could impede progress on inflation, whereas being too cautious could weaken economic activity and employment. When assessing future adjustments to the federal funds rate’s target range, the FOMC will consider incoming data, the evolving outlook, and the risks involved.”
Gas prices show a slight increase. According to reports: “With impending tariffs looming, the national average price for a gallon of gas increased by two cents over the past week to $3.13. New data from the Energy Information Administration revealed that gasoline demand rose from 8.30 million barrels per day last week to 8.32 million. The total domestic gasoline supply grew from 248.9 million barrels to 251.1 million, while gasoline production decreased slightly, averaging 9.2 million barrels per day.”
Unemployment claims decrease. Claims dropped to 213,000 for the week ending February 8, down from 220,000 the previous week. This continued decline aligns with historical levels associated with economic growth.
Mortgage rates decrease slightly. As per Freddie Mac, the average 30-year fixed-rate mortgage fell to 6.87%, down from 6.89% last week. “This week, the 30-year fixed-rate mortgage has edged down to its lowest level of 2025 so far. This recent stability in mortgage rates is favorable for prospective buyers as purchasing demand is higher compared to this time last year, indicating a potential thaw in buyer activity.”
There are a total of in the U.S., with 86.6 million being and (or ) counting as . Almost all of those with mortgage debt have fixed rates, and most obtained their loans before rates surged from the lows of 2021. This indicates that most homeowners are not particularly sensitive to fluctuations in home prices or mortgage rates.
Small business optimism cools after significant rise. From the report:
“Small business owners entered the new year with a notable surge in optimism. Currently, 17% (seasonally adjusted) perceive the current period as a good time for considerable expansion, an increase from merely 4% a few months back. A seasonally adjusted net 20% expect real sales growth, up from a net negative 18% previously. Meanwhile, a seasonally adjusted net 47% anticipate improved business conditions, compared to a net negative 13% just four months earlier (after factoring in negative responses). Reports of unfilled job openings and hiring plans remain historically high. Over the past four years, owners have struggled to fill these positions as government-related hiring has soared, leading to tough competition.”
Industrial activity sees a rise. In January, industrial output increased by 0.5% compared to the previous month, while manufacturing output saw a slight decline of 0.1%.
Offices remain relatively vacant. From recent reports: “On the peak day for office occupancy, 63.3% of offices were occupied last Tuesday, reflecting a decrease of one-tenth of a point from the previous week. Austin saw a 2.7-point increase in occupancy on Tuesday, rising to 71%, with a 7.5-point increase on Wednesday, reaching 71.9%. The average low occupancy was recorded on Friday at 35.8%, which is a nearly full-point drop from the previous week.”
Near-term GDP growth forecasts remain optimistic. According to the projections, real GDP growth is expected to climb at a rate of 2.3% in the first quarter.
Long-term prospects for the stock market remain positive, underpinned by . Furthermore, earnings are the .
Demand for goods and services is steady, and the economy continues its growth trajectory. However, the pace of economic growth has moderated from previous elevated levels. At present, the economy is feeling calmer as .
To be explicit: The economy remains robust, supported by . Job creation continues apace. Additionally, the Federal Reserve — having — has .
Federal Reserve Board Chairman Jerome Powell testifies before the House Financial Services Committee during a hearing on the Semi-Annual Monetary Policy Report, on Capitol Hill in Washington, Wednesday, Feb. 12, 2025. (AP Photo/Jose Luis Magana) · ASSOCIATED PRESS
We find ourselves in an unusual situation where the tangible economic data appears robust. Despite consumer and business sentiment being relatively low, real consumer and business activities are continuing to grow and reach record highs. From an investor’s viewpoint, it is evident that the hard economic data is maintaining stability.
Analysts predict that the U.S. stock market could achieve growth, driven primarily by . Since the pandemic, companies have strategically adapted their cost structures to become more efficient. This includes investments in hardware powered by AI, leading to positive operating leverage where modest sales growth — even in a less dynamic economy — translates into significant profit gains.
Nevertheless, this does not imply we should become complacent. Various risks can arise — such as , , , and more. Additionally, many long-term investors must navigate through periods of turbulence as they build their wealth in these markets. .
At present, there is no substantive reason to believe that the economy and the markets won’t eventually overcome future challenges. The streak continues, providing a semblance of predictability that long-term investors can count on.
