Markets moved on inflation data. Should you?

U.S. Consumer Price Index (CPI) data for December was released last week, and while year-over-year prices ticked up slightly to 2.9%, the increase was less than what analysts had anticipated. This news was welcomed by markets, which hope that the positive surprise could prompt the U.S. Federal Reserve (Fed) to cut interest rates faster than expected. Our perspective is that this is just a single data point, and on its own, it doesn’t tell us much. Just a week earlier, markets had been concerned about inflation, and this data seemed to calm those fears, at least for the time being. But as I’ve noted previously, we expect ups and downs throughout the year—one month, inflation may come in a bit hot, while the next, it might cool down. We think a larger sample size—more than one or two months of data—is needed before we can really get a sense of the inflation trajectory. It is also worth considering external risks that may affect inflation. Since early December, we’ve seen oil prices tick higher. But energy markets tend to alternate between upswings and downswings, and can be expected to come back down eventually. And while tariffs are a risk, recent comments from the Trump transition team suggest that any new measures will likely be implemented gradually, reducing the chances of a sudden spike.

In our 2025 market outlook, we mentioned that we’re bullish on Financials for the coming year. In our portfolios, we’ve been overweight U.S. banks compared to the S&P 500 for some time, and despite some volatility, it’s been a good call. Valuations weren’t bad to begin with, especially relative to Technology and particularly the Magnificent 7 (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla). Recent earnings reports have made our thesis look even better: Citigroup set the tone with strong earnings, which were followed by good numbers from Wells Fargo, JPMorgan, and Bank of America. The market’s reaction to these reports was extremely strong and the momentum continued to the end of the week. Overall, the trend for Financials is positive, and more momentum could be on the horizon if investors prioritize diversification by putting new money into areas of the market other than the Mag 7.

Last year, we were starting to get nervous about Consumer Discretionary—as consumers’ excess savings gradually depleted, we thought spending on higher-priced items would decline. While we did see something of a shift toward Consumer Staples among lower-income consumers, research conducted by our Global Equity team has revealed that the high-end consumer is still in relatively good shape, having benefitted from better market returns and a strong U.S. economy. These consumers—both in the U.S. and globally—are still willing to spend on the right luxury items. One of the key factors is supply constraint—from watches to handbags, it is an item’s rarity that often makes it desirable. In some respects, it’s similar to the housing market: if there’s a limit to how many homes can be built at a desirable location, like with lakefront or oceanfront properties, that exclusivity will drive demand. Our expectation is that higher-end consumers’ spending will continue well into 2025. One wild card to monitor is China. It's no secret that tariffs and a weak property sector have been a drag on Chinese consumer confidence; these headwinds have largely been priced into Chinese markets already. If Trump’s new tariffs turn out to be milder than anticipated, however, that could result in some upside for investors. Likewise, if Beijing’s stimulus plan is more robust than expected, that headwind could become a tailwind. A strong China is very good news for the luxury market, and while we aren’t currently factoring these potential upside surprises into our positioning, they are within the range of possibilities.

For more insights on market risks and opportunities, explore our 2025 Investment Outlook Centre.