The Legend Is Stepping Down, the Fed Will Step Up and Why I'm Cautious on Palantir

Oh, he hung around afterward for a few years as a coach. It had been obvious for a couple of seasons at that point that he was not the player that he once was. Once the poster-ballplayer for the classic five-tool athlete, he could still hit the occasional home run, he could still steal a base once in a while. He could not play center field very proficiently by then though and his ball club had to move him to first base, which was less physically demanding. He was arguably the greatest ballplayer who had ever lived. Those who disagree, do agree that he was at least among the very best. All were sorry to see the "Say Hey" kid hang up his spikes. 

It was September 25, 1973, at Shea Stadium in the New York City borough of Queens, which happens to be my hometown. I was an impressionable youngster at the time, who honestly thought that the "Kid" would eventually come out of his long slump and reclaim his lofty place as a New York and baseball legend. Willie Mays spoke before the crowd: “This is a very sad night for me. I may not look it but, in my heart, I’m sad because I hear you cheering for me and I am unable to do anything for you." Willie finished, “I look at the kids over here (his ballclub that was experiencing the heat of a pennant race that year) and they are playing, and they are fighting for themselves, tells me one thing: Willie, say good-bye to America." 

Some might find this hard to believe, but even as a grammar schooler, I followed the financial markets. I traded my own account with my paper route money under my father's guidance by the time I was 13 years old, which was also the first year that the Marine Corps rejected my ill-advised application for underage enlistment. That rejection really amounted to a nice letter from a Major telling me to go away for a few years and come back when I was 17. I would be turned down again two years later for the same reason by the U.S. Army. 

My Dad taught me the basics of fundamental analysis and told me of this investor who he believed was really becoming something special. One night I remember hearing Buffett's name on television. I used to watch Louis Rukeyser with my dad when I was a child. I heard that name, and then I saw my dad suddenly focus more on that television and less on everything else.

The Only Constant...is Change 

On Saturday, it happened. I had recently cut loose my long position in Berkshire Hathaway, the B stock BRK.B. No, I did not know this day was coming, at least not now. I held on to those shares for years. I did know that doing what he loved had to be less fun for Warren Buffet in 2025 than it used to be. I knew that at 94 years of age, holding down one of the most demanding jobs there is, and remaining sharp, had to be tough without his career-long friend and business partner, Charlie Munger. Munger, who was every bit as revered as Buffet, if slightly less high-profile in nature, passed away at the age of 99 in late November of 2023. 

This past Saturday, Berkshire Hathaway BRK.A held its annual shareholder meeting and released quarterly numbers. The numbers would not be making the headlines though. Toward the end of said meeting, Warren Buffet, CEO, told the crowd, told his people: "Tomorrow, we're having a board meeting of Berkshire, and we have 11 directors. Two of the directors, who are my children, Howie and Susie, know what I'm going to talk about there. The rest of them, this will come as news to, but I think the time has arrived where Greg should become the chief executive officer of the company at year end." 

The "Greg" in this story is Greg Abel, who was designated as the eventual day to day leader by Buffett and Munger back in 2021. Abel, for those asking, is 62 years of age. As for the "Oracle of Omaha"... the man himself reassured investors that he will still "hang around" to help, but that Abel, the current Vice Chair of Berkshire's non-insurance operations. will as of the new year, have the final word on all operations and capital deployment.

The March of Time 

Willie outlasted his peers, Mickey Mantle and Duke Snider. He was traded away from his teammate Willie McCovey. He was no longer close to being at the top of his game. He said goodbye. Buffett is different. He outlasted Munger, but he is sharper now at 94 than most of us ever were at our best. Maybe without his teammate, without "his" Willie McCovey, he felt the love for the game slip away. I don't know. 

What I do know is that we who continue to play this game were lucky enough to overlap careers with the greatest of all-time at his craft, at our craft. We were lucky to learn from Warren Buffet and invest in his success. Personally, I spoke to him twice, answering a telephone in my younger years in calls that were meant for someone more important than myself at the time. I remember hearing his voice as if I were speaking to someone truly great, someone kind of like Willie Mays.

The Week Past

Domestic equity markets closed out the past week in very strong fashion. The Nasdaq Composite rallied 1.51% on Friday, in line with the S&P 500. That index gained 1.47% as both of these indexes put together back-to-back winning weeks and three green weekly candlesticks in the past four.

Equity index futures have shown some weakness overnight as Sunday melts into Monday, putting the S&P 500's impressive nine-day winning streak in jeopardy. After Friday's robust performance that did come at the expense of the bond market, the S&P 500 heads into the new week with its longest daily winning streak since November of 2004.

That's almost 21 years for those who like to keep track of such things. In fact, that's so long ago, it was still possible for human traders to spot algorithms in action and reverse engineer them in our heads in order to figure out what they were trying to do. Yes, there was once a time when humans, while not faster than algorithmic traders, were still smarter. At that time, a lot smarter. We could trick them into making mistakes at the point of sale, which was glorious.

Sentiment for the week improved dramatically as rumors of a trade deal with India being all but done stretched up and down Wall Street, while other rumors bounced around that had Washington and Beijing at least talking. Beyond the rumor mill, both the earnings and macroeconomic calendars were heavy, even if Fed officials, due to their media blackout period, were not able to speak publicly.

Calendars

It would be difficult to argue what was more important to the markets last week. The Mag 7 was out in front, leading the parade of earning releases that made headlines. Both Meta Platforms META and Microsoft MSFT impressed investors and markets seemed to react well. Contrarily, both Amazon AMZN and Apple AAPL failed to impress investors, and markets appeared to simply trade around those two names. Interestingly, last week, Microsoft reclaimed the title as the world's largest company by market cap, ripping the top spot away from Apple. Based on Friday's closing prices, Microsoft heads into the new week valued at $3.24 trillion, while Apple's market value decreased to $3.07 trillion.

Last week also got some help, it would seem, from a couple of high-profile macroeconomic data-points. First, the Bureau of Economic Analysis released its initial estimate for Q1 GDP that showed the economy contracting by 0.3% (q/q, SAAR), but under the hood, actually showed a pretty decent quarter. There also seemed to be a $185 billion (or so) discrepancy in the numbers that I would expect to be cleaned up when that print is revised in a month's time.

On top of that, the Bureau of Labor Statistics released a stronger than expected labor market survey results for the month of April on Friday. Did markets react well to the idea that the economy is nowhere near as close to recession than we had thought a week ago at this time? I would think that the case, as Treasury yields worked their way higher on Friday and equity markets seemed not to care in the least.

This Week is About the Fed

What the markets will be trying to discount this week will be what the Fed releases this Wednesday afternoon. There are no quarterly economic projections to be released by the Federal Open Market Committee at this meeting, so it will just be the official policy statement followed by the Fed Chair's press conference. There is almost no consideration on Wall Street at this time that the central bank might take some kind of action this week. What traders and investors will be pricing in and reacting to will be what Jerome Powell and his crew signal for the coming months.

This morning, futures markets trading in Chicago are pricing in a greater than 98% probability for no changes made to the target range for the Fed Funds Rate this Wednesday and a 66% likelihood for no change made at the June 18 policy meeting. That target range now stands at 4.25% to 4.5%. There is now a 71% probability for a quarter-point rate cut on July 30 and a 79% probability for three-quarter-points worth of rate cuts in 2025. These same markets are currently pricing in 1.25 percentage points worth of rate cuts through June of 2026.

The Numbers

What the major to mid-major U.S. equity indexes did as equity markets struggled through the week just completed. Most of these indexes remain close to the midpoints of their ranges for April.

- The S&P 500 gained 1.47% on Friday and 2.92% for the week.

- The Nasdaq Composite gained 1.51% on Friday and 3.42% for the week.

- The Nasdaq 100 gained 1.6% on Friday and 3.45% for the week.

- The Russell 2000 took back 2.27% on Friday, gaining 3.22% for the week.

- The S&P Small Cap 600 gained 2.27% on Friday and gained 3.18% for the week.

- The S&P Mid Cap 400 ran 2.37% on Friday and ran 3.54% for the week.

- The Dow Transports gained 3.33% on Friday and gained 4.3% for the week.

- The Philly Semiconductors gained 3.52% on Friday, but "just" 3.42% for the week.

- The KBW Bank Index gained 2.69% on Friday and an impressive 4.3% for the week.

On Friday, all 11 S&P sector SPDR exchange-traded funds closed in the green, led higher by the Financials XLF, Industrials XLI and Materials XLB as the cyclicals outperformed the broader marketplace. That said, even though the four defensive sectors brought up the rear, the last-place Staples XLP still gained more than half of 1%. 

For the week, ten of the 11 sector SPDR funds closed in the green for a second week in a row. The Industrials led the five days past, gaining 4.32%, followed by Technology at +3.9%. Only Energy closed in the red ahead of this weekend's OPEC+ meeting where the group decided to increase output by another 411,000 barrels per day in June after already deciding to increase output by that same amount in May.

Earnings

We're now well past the midpoint of the first quarter 2025 earnings season. According to FactSet, with about 72% of the S&P 500 having reported, 76% of firms so far have beaten earnings expectations while 62% of firms so far have beaten expectations for revenue generation.

On a year over year basis... the S&P 500 is running at a Q1 blended (earnings & expectations) growth rate of 12.8% for earnings, up "huge" from just 10.1% last week and 7.2% the week prior. Revenue growth is running at 4.8%, up from 4.6% a week ago. Interestingly, it appears that the first quarter may have pulled activity forward from the second quarter. Consensus for second-quarter earnings growth is down to 5.7% from 6.4% a week ago and from 9.1% four weeks ago. Q2 revenue growth is currently seen at growth of 4.0%, down 4.6% four weeks ago.

For the first quarter, Health Care is currently expected to show earnings growth of 42.7%, with Communication Services now a very distant second place at growth of 27.9%. Just three sectors are still expected to post Q1 earnings contractions, down from four a week ago, led lower by Energy (-14.4%) and the Materials (-6.9%).

For the full year 2025, Wall Street now sees earnings growth of 9.5% even, down from 9.7% a week ago, and 11.3% four weeks ago. Expectations for full year revenue growth have fallen from 5.4% to 5.0% over those same four weeks.

As far as valuation is concerned, the S&P 500 went into this past weekend trading at 20.2 times forward looking earnings, up from 19.8 times a week ago and 25.1 times 12-month trailing earnings, up from 24.6 times a week back. These valuations are both now above their five-year averages of 19.9 times for forward looking earnings and 24.7 times for trailing twelve-month earnings, respectively.

The GDP Game

Last week, the Atlanta Fed revised their GDPNow model for the second quarter down to growth of 1.1% (q/q, SAAR) last week from 2.4% the week prior. There is no estimate for GDP ex-the gold trade at this time. Among other regional central bank district branches running close to real-time GDP models, the New York Fed's estimate for Q2 growth now stands at 2.34%, down from 2.72%, while the Cleveland Fed now sees Q2 growth of 1.97%. The St. Louis Fed's initial model for the second quarter has not yet been published.

Where is my trusted Hedgeye Nowcast Model? If you're a reader of mine, you know that I trust their work enough to pay for it because I have outsourced the need for retaining a staff in this way. Hedgeye, after literally nailing Q1 GDP when so many others were not close, now sees the second quarter reverting back to growth well above the Wall Street consensus view for something close to 1.5%.

The Chart...

The pattern we discussed last week at this time has continued. Readers will see the "bullish" ascending triangle pattern that we showed you two weeks ago. 

As the S&P 500 broke out from the line of resistance created by that pattern, the 50-day simple moving average was retaken by the index last week after finding support at the 21-day exponential moving average. The next potential upside catalyst for our market's broadest large cap index is its 200-day simple moving average. The index closed just about 1% shy of making a run on that level on Friday afternoon. As seen at the 50-day line, taking and holding this line would force portfolio and risk managers to increase long side equity exposure.

What's Ahead?

- The domestic macroeconomic calendar is rather light this week. The highlight will likely be the ISM Services PMI release for the month of April later today (Monday). Outside of that the U.S. Treasury will auction off $42 billion worth of new Ten-Year Notes on Tuesday afternoon and $25 billion worth of Thirty-Year long bonds on Thursday afternoon.

- The Federal Reserve's FOMC will make the headlines on Wednesday afternoon as the committee comes out of their media "Blackout" period and publishes the results of their policy decision. The 2 p.m. ET official statement will be followed by Chair Powell's press conference a half hour later. Investors should be cognizant that this Friday, I already have nine public appearances by Fed officials on my radar. Is the Fed preparing to force a narrative? Or is this simply some coincidence that several Fed officials are making appearances at both the Reykjavik Economic Conference in Iceland and the Hoover Monetary Policy Conference at Stanford University? Guess we'll know then.

- Again, the earnings calendar is extremely heavy this week. However, the corporations releasing their data on the whole, are not of the same market-wide impact as were the Mag 7 names that went to the tape last week. On Monday afternoon, we'll hear from both Ford Motor F and Palantir Technologies PLTR. Tuesday afternoon, Advanced Micro Devices AMD will go to the tape, followed by the Walt Disney Company DIS and Uber Technologies UBER on Wednesday morning. Then, on Thursday, Match MTCH, Coinbase Global COIN, Rocket Lab USA RKLB and McKesson MCK will all go to the tape. 

- The Sarge-folio is closely watching the Palantir and Rocket Labs releases and has an interest in the Ford release as well. I never like when a stock on my pad runs sharply higher into earnings and that is exactly what Palantir has done. That stock, easily my largest holding now, even with some profit taking on Friday, is up 88% since its low on April 7th.

Economics (All Times Eastern)

09:45 - S&P Global Services PMI (Apr-F): Flashed 51.4

10:00 - ISM Non-Manufacturing Index (Apr): Expecting 50.4, Last 50.8.

The Fed (All Times Eastern)

Fed Blackout Period.

Today's Earnings Highlights (Consensus EPS Expectations)

Before the Open: BNTX (-2.35), CMI (4.92), ON (.50), TSN (.82)

After the Close: CLX (1.56), CTRA (.79), F (.02), PLTR (.13)

At the time of publication, Guilfoyle was long MSFT, F, PLTR, RKLB equity.