Day Hagan Catastrophic Stop Update February 4, 2025
A downloadable PDF copy of the Article:
The Catastrophic Stop model held steady at 72.9%, the same level as last week. On average, the model’s technical indicators remain bullish, and the external indicators are neutral.
Figure 1: Catastrophic Stop Model versus the S&P 500 Total Return Index
Sentiment has reversed from overly pessimistic levels and is now neutral as a factor.
Figure 2: Short-term sentiment is no longer a tailwind and not yet a headwind.
Monday’s tariff volatility appears to have been short-lived—for the time being anyway. GS sent out some interesting research on the potential ramifications, and in the spirit of “it might not be over yet,” here are a few of the most interesting observations:
“Goldman Sachs US Economics Research previously estimated that a sustained 25% tariff on imports from Canada and Mexico would increase the effective US tariff rate by 7 percentage points (pp) from the current 3%, implying a 0.7% increase in US core PCE prices and a 0.4% hit to GDP”
“Large tariffs pose downside risk to our S&P 500 earnings estimates and return expectations. If company managements decide to absorb the higher input costs, then profit margins would be squeezed. If companies pass along the higher costs to its end customers, then sales volumes may suffer. Firms may try to push back on their suppliers and ask them to absorb part of the cost of the tariff through lower prices. We estimate that every 5pp increase in the US tariff rate would reduce S&P 500 EPS by roughly 1-2%. As a result, if sustained, the tariffs announced this weekend would reduce our S&P 500 EPS forecasts by roughly 2-3%, not taking into account any additional impact from major financial conditions tightening or a larger-than-expected effect of policy uncertainty on corporate or consumer behavior.”
“Our FX strategists believe tariffs would also lead to further dollar strength, although this should have a limited impact on aggregate S&P 500 earnings. In total, S&P 500 companies derive 28% of revenues outside the US. Our top-down earnings model suggests that, holding all else equal, a 10% increase in the trade-weighted USD would reduce S&P 500 EPS by roughly 2%. S&P 500 companies report less than 1% of revenues explicitly from each of Mexico and Canada.”
“Our economists believe that upside risk to inflation will likely cause a short-term increase in yields, particularly on the short end of the curve. However, they expect that ultimately the downside risk to the economic growth outlook posed by trade conflict will prevent a major increase in long-term yields.”
“Combining these modeled EPS and valuation sensitivities suggests a near-term downside of roughly 5% to S&P 500 fair value if the market prices the sustained implementation of the newly announced tariffs.”
The chart below visually represents U.S. trade volumes with Canada and Mexico (through the end of October 2024). Note the difference between import and export values, i.e., the U.S. buys much more from Canada and Mexico than the other way around, potentially giving the advantage to the U.S. in a trade war. (To be clear, this is “Goods” only, not services.)
Figure 3: U.S. Trade in Goods with Canada and Mexico
Reviewing relative valuations, we see that Mexican and Chinese equities, on average, are trading below their long-term average Forward P/Es, while Canada looks a bit stretched. This speaks, in part, to each country's ability to weather the storm. For perspective, the MSCI U.S. index is trading at 22.2x Forward P/E.
Figure 4: MSCI Mexico Forward P/E
Figure 5: MSCI Canada Forward P/E
Figure 6: MSCI China Forward P/E
Our February issue of the Smart Sector update will be out tomorrow. Below are the recent highlights and lowlights for each sector’s top two holdings (by capitalization weighting) and a brief discussion about which indicators are driving the model results. Financial statement results reflect the most recent earnings report releases. The publication will be available at https://dayhagan.com/research.
Consumer Discretionary: (Amazon and Tesla.) In January 2025, Amazon.com, Inc. showcased impressive financial results, reporting a worldwide revenue of $158.9 billion for Q3 2024, reflecting an 11% year-over-year growth driven by strong performance across its segments, including North America, International, and AWS. The operating income soared to a record high of $17.4 billion, a remarkable 56% increase from the previous year, marking the highest quarterly operating income in the company’s history. AWS emerged as a key growth driver with a 19.1% revenue increase, achieving an annualized run rate of $110 billion. As a result, Amazon’s stock displayed an 8.34% return for the month and a 53.14% return over the past year. In contrast, Tesla faced significant challenges in January 2025. While the company reported record vehicle deliveries of 495,570 in Q4 2024, its annual sales declined for the first time in over a decade. Tesla’s Q4 revenue fell short of expectations at $25.71 billion, resulting in a 71% decline in net income to $2.3 billion. Despite these issues, Tesla is pivoting towards growth with initiatives like reducing manufacturing costs to below $35,000 per vehicle and launching a paid robotaxi service in Austin, Texas, scheduled for June 2025. The Composite model remains bullish, with measures of trend, overbought/oversold, breadth, valuations, and earnings surprises positive. There are signs that the uptrend may be stretched in the near term, with deviation from trend and short-term momentum indicators peaking. Nevertheless, the weight of the evidence remains positive.
Figure 7: Positive earnings surprises continue to support the consumer discretionary sector.
Consumer Staples: (Costco and Walmart.) Costco reported a strong sales growth of 8.2% in comparable store sales and an increase in its membership base to 61.2 million households. The company also expanded its global footprint by opening three new warehouse locations, bringing the total to 833. However, it faced difficulties, including a slight decline in gross margin to 11.2%, attributed to increased competition and pricing pressures. Additionally, e-commerce sales growth slowed to 6.3%, and the company’s stock price fell by 3.2%, raising investor concerns about maintaining growth momentum. Meanwhile, Walmart took significant steps with a comprehensive brand refresh to position itself as a tech-driven omnichannel retailer. The company expanded its same-day pharmacy delivery service nationwide and announced a $4.5 billion investment in Canada to enhance its store and supply chain presence. However, Walmart is contending with intensified competition in pharmacy delivery, potential tariffs affecting its supply chain, and rising concerns over retail crime, all of which present challenges in an increasingly competitive retail environment. The Composite model is negative, with technical and operating environment-related indicators continuing to deteriorate. Measures of trend, breadth, momentum, pricing power for staples, and food sales volumes are negative. The only bright spots are that the significant short interest that had built up around the sector’s constituents is declining (investors taking profits on their shorts), and valuations are a bit better than the average sector. Until the technical backdrop improves, we will remain underweight.
Figure 8: If the net new highs indicator moves to a buy signal, we will look to increase exposure.
Communication Services: (Meta and Google/Alphabet.) In January 2025, Meta (formerly Facebook) and Google both experienced notable highlights and challenges. Meta reported impressive quarterly results, with revenue increasing by 8% year-over-year to $32.6 billion and a net income rise of 5%. Additionally, the company’s shares reached five consecutive record highs, climbing 12% to $250 per share, and its metaverse division saw a 20% boost in user engagement. However, Meta faced rising operating expenses, which increased by 12% in Q4 2024, alongside ongoing regulatory scrutiny and internal restructuring, including a 5% workforce reduction and a rollback of diversity initiatives. Conversely, Google achieved significant milestones, with its share price hitting an all-time high, a 15% increase from the previous month. The company reported a robust 18% year-over-year revenue growth to $72 billion and a 20% growth in net income, bolstered by a 25% revenue increase in its cloud computing division. Nonetheless, Google contended with regulatory scrutiny due to antitrust investigations, setbacks in its self-driving unit Waymo following a fatal accident, and criticism regarding YouTube’s handling of misinformation. Both companies’ futures hinge on navigating these ongoing challenges while capitalizing on their respective strengths. The Composite model declined with the February update as price momentum and the pace of positive earnings revisions stalled.
Figure 9: Signs of price momentum stalling.
Energy: (Exxon and Chevron.) Exxon Mobil achieved record production levels, particularly in the Permian Basin and Guyana, with a total output of 4.6 million barrels of oil equivalent daily. The company also reported strong Q4 2024 earnings of $7.39 billion, surpassing analysts’ expectations, and successfully realized $12.1 billion in cumulative structural cost savings since 2019. However, it faced significant headwinds, including a sharp decline in refining earnings, which plummeted to $323 million from $3.2 billion the previous year, and a drop in full-year earnings from $38.57 billion to $33.46 billion. Similarly, Chevron’s January performance was mixed. The company experienced an 8% increase in share price, closing at $120, and reported robust Q4 2024 earnings of $5.2 billion. Notably, Chevron announced its commitment to invest $3 billion in renewable energy projects over five years. Nonetheless, it encountered legal challenges with a court ruling mandating $500 million in damages for environmental violations and a 2% decline in oil production due to maintenance issues. Overall, both companies demonstrated operational resilience while navigating significant market and regulatory challenges. The Composite model moved higher this month, with momentum, trend, and reversal from oversold indicators improving. The strong U.S. dollar has been a headwind, but it appears to be peaking (next chart). The net result is we remain neutral.
Figure 10: A weaker dollar would support U.S. energy exports.
Financials: (Berkshire Hathaway and JP Morgan Chase.) Berkshire Hathaway reported record cash reserves of $325.2 billion and achieved a 52-week high stock price of $491.67, contributing to its market capitalization surpassing $1 trillion. The company’s diversified business model across sectors like insurance and utilities continued to deliver stable returns. However, concerns arose from a decline in operating earnings to $4.68 per share due to reduced underwriting income and ongoing litigation related to the 2020 wildfires, prompting worries about the financial health of its subsidiary, PacifiCorp. Additionally, uncertainties regarding Warren Buffett’s succession plan weighed on investor sentiment. JPMorgan Chase also showcased strong performance, reporting Q4 2024 earnings of $3.57 per share, significantly exceeding estimates, supported by a 12% revenue increase in its consumer banking division. Its stock price surged to $165 per share, reflecting investor confidence. Despite these gains, the bank faced pressures from a $1.2 billion increase in loan loss provisions due to potential economic slowdowns, regulatory scrutiny regarding anti-money laundering compliance, and a 3% decline in net interest income attributed to a flattening yield curve. The Composite model increased with measures of trend, momentum, volatility, global economic activity, business credit conditions, and the yield curve positive. Negative indicators include weaker bank loan growth, some widening of credit spreads for financial institutions’ debt, and mild overbought readings. We remain neutral.
Figure 11: Credit spreads (OAS) for the Financials sector continued to move higher in January. While low historically, we are watching this development closely.
Health Care: (Eli Lilly and UnitedHealth Group.) Eli Lilly experienced strong revenue growth, expecting 2025 sales to reach between $58 billion and $61 billion, largely attributed to the successful launches of its new drugs, Mounjaro and Zepbound. The company also received approvals for Ebglyss in the U.S. for atopic dermatitis and Kisunla in Japan and Great Britain for Alzheimer’s disease. Additionally, positive clinical trial results for donanemab highlighted its commitment to innovative therapeutics. However, Lilly faced setbacks, including a revenue guidance cut for Q4 2024 due to sluggish incretin market growth and a $142 million non-cash goodwill impairment charge. Conversely, UnitedHealth Group reported a robust financial performance with 2024 revenues of $400.3 billion, an 8% increase from 2023, and projected 2025 revenues of $450 billion to $455 billion. Its Optum Health segment saw revenue growth driven by value-based care. However, the company dealt with the tragic murder of its CEO, Brian Thompson, impacting its annual investor conference and regulatory challenges concerning its proposed $3.3 billion acquisition of Amedisys. Both companies are navigating a complex landscape while focusing on strategic growth initiatives. The Composite model improved, with technical measures evaluating trend, momentum, mean reversion, and downside volatility turning positive. Indicators calling the operating environment, like health care new construction, medical CPI (pricing power), earnings revisions, and credit spreads, are negative. The net result is a modest increase in exposure, and we remain neutral.
Figure 12: Relative strength has turned positive.
Industrials: (GE and Caterpillar.) GE reported impressive Q4 2024 earnings of $0.82 per share, surpassing analysts’ expectations, with revenue reaching $17.35 billion—an increase of nearly 20% year-over-year. Additionally, GE’s renewable energy division experienced a 15% uptick in orders, bolstered by rising demand for wind turbines and solar power. A notable achievement was a $3.5 billion contract modification awarded by the U.S. Air Force for the Next Generation Air Dominance program. However, struggles in its aviation, healthcare, and power divisions, with revenue declines of 12%, 5%, and 7%, respectively, highlighted ongoing supply chain issues and shifting market dynamics. Conversely, Caterpillar celebrated a record adjusted profit per share of $21.90 in 2024, marking a 3% increase from the previous year, alongside the launch of a limited-edition line of machines for its centennial. The company also initiated a $5 billion share buyback program. Nonetheless, CAT faced a 3% overall sales decline, compounded by a 4% drop in mining equipment sales and looming economic and geopolitical uncertainties affecting future performance. The Composite model improved, with technical measures gaining ground. We are increasing exposure.
Figure 13: Commodity prices continue to rise.
Information Technology: (Apple, Microsoft, and NVIDIA.) Apple announced record revenue of $124.3 billion for Q1 2025, marking a 4% increase year-over-year, along with earnings per share (EPS) of $2.40, up 10%. The growth was bolstered by a strong services segment that reached an all-time high of $26.3 billion, thanks to robust performance in Apple Pay and the App Store. Furthermore, Mac and iPad revenues showed positive trends, increasing by 16% and 15%, respectively. However, Apple faced setbacks, notably with iPhone revenues declining by 0.8% to $69.14 billion, the largest miss in two years. Additional challenges included an 11% drop in Greater China revenue and a 2% decline in wearables sales. Conversely, Microsoft exhibited impressive growth, with cloud revenue surpassing $40 billion—up 21% year-over-year—and its AI business achieving a remarkable 175% growth, reaching a $13 billion annual revenue run rate. Investment in OpenAI reinforced Microsoft’s position in the generative AI sector. However, growth in Azure non-AI services fell short of expectations, and the company faced legal complications from a lawsuit involving Elon Musk. NVIDIA reported record quarterly revenue of $35.1 billion, a staggering 94% increase year-over-year, propelled by its data center segment and the launch of new GeForce RTX 50-series graphic cards. Despite these successes, challenges such as supply shortages and high pricing—especially for the RTX 50-series—limited accessibility for budget-conscious consumers, while gaming revenue was expected to decline sequentially due to these supply constraints. Overall, while each company demonstrated significant strengths in revenue and innovation, they also navigated notable market challenges. The Composite model declined with the February update, with measures of momentum, overbought/oversold, and breadth turning negative. Moreover, our earnings revisions indicator has turned negative as inflation expectations increase—historically negative for longer-duration assets like technology stocks. We are reducing exposure again this month.
Figure 14: The smoothed percentage of positive earnings revisions is rolling over.
Materials: (Linde PLC and Sherwin-Williams.) Linde PLC achieved a 12% year-over-year revenue growth for Q4 2024 and earnings per share that exceeded analyst predictions. The company announced a $5 billion share buyback program to enhance shareholder value further. However, it faced challenges, including supply chain disruptions that slightly impacted operating margins, market volatility reflected in a share price dip to a one-year low, and concerns regarding a debt-to-equity ratio of 0.43. Similarly, Sherwin-Williams reported a remarkable $23.10 billion in consolidated net sales for 2024, with a 9.5% increase in adjusted diluted net income per share to $11.33. The company’s share price rose 7% to $350 following the news, supported by the strategic acquisition of a smaller paint manufacturer. Nonetheless, it contended with supply chain difficulties that hindered operational efficiency, rising raw material costs impacting profit margins, and environmental criticisms related to certain chemicals in its products. The Composite model improved slightly but is still bearish, even though short-term momentum was evident as the sector rebounded from deeply oversold conditions. We remain underweight until we see additional model improvement.
Figure 15: Emerging Market weakness is still a headwind for the Materials sector.
Real Estate: (Prologis, Equinix, and American Tower.) Prologis reported a robust Q4 2024, with revenue increasing 12% year-over-year to $1.5 billion, alongside a remarkable 101.5% rise in net earnings per diluted share. The company’s occupancy rates remained strong at 97%, bolstered by strategic acquisitions of logistics facilities in Europe. However, it faced heightened competition affecting rental rates and delays in its development pipeline due to supply chain disruptions. Equinix also demonstrated strong financial results, achieving 8% revenue growth to $1.6 billion, driven by demand for data center services. The inauguration of two new International Business Exchange data centers in Tokyo and Singapore marked its expansion into the Asia-Pacific region. Despite reaching a 52-week high, Equinix grappled with declining profit margins and challenges in securing long-term contracts in Europe. Meanwhile, American Tower experienced 8% revenue growth. The company announced a significant acquisition in the European market, enhancing its global positioning. However, regulatory challenges and increased debt levels due to the acquisition raised concerns, alongside guidance that fell below market expectations. While these companies showcased strong operational performances, they must navigate competition, regulatory hurdles, and market volatility to sustain growth. The Composite model improved modestly with some signs of mean reversion, but we remain modestly underweight.
Figure 16: Weakness in the homebuilder industry is negative for the Real Estate sector.
Utilities: (NextEra and Constellation Energy.) NextEra Energy appointed Alan Liu as its new CEO, marking a strategic leadership transition. The company was also recognized as the top electric and gas utility on Fortune’s 2025 “World’s Most Admired Companies” list for the 17th time in 19 years while reaffirming its long-term financial guidance. However, the company experienced significant lowlights, including a Q4 2024 earnings miss, with reported revenue of $294 million falling short of expectations by $56.95 million and a sharp decline in stock price following this disappointing report. Additionally, ongoing investigations prompted legal uncertainties. In contrast, Constellation Energy announced its plan to acquire Calpine in a $16.4 billion deal, positioning itself as the largest power generator in the U.S. They secured a landmark $1 billion contract with the U.S. General Services Administration, leading to a stock price increase of over 25%. Nevertheless, Constellation faces regulatory approval delays for the merger, a slight decline in profit margins, and heightened debt concerns, with its debt-to-equity ratio rising from 0.4 to 0.6. The Composite model improved significantly, with measures of trend, momentum, overbought/oversold, and breadth positive. Looking at the operating environment, the pullback in AI-related names due to the “DeepSeek” disruption has garnered concern for the Utilities sector, as expectations for exponential growth in energy demand may be overly optimistic. Nonetheless, given the model improvement, we are adding exposure.
Figure 17: The Utilities sector price momentum shows oversold conditions are still in place.
Our current sector allocations are as follows (relative to S&P 500 sector benchmark weightings):
Sector Outlook
Sector
Consumer Discretionary
Consumer Staples
Communication Services
Energy
Financials
Health Care
Industrials
Information Technology
Materials
Real Estate
Utilities
Outlook (relative to benchmark weighting)
Overweight
Underweight
Underweight
Neutral
Overweight
Neutral
Overweight
Underweight
Underweight
Underweight
Overweight
Bottom Line: We continue to view the uptrend in U.S. equities as intact. However, sector allocations are slowly morphing toward more cyclical/defensive sectors.
Our goal is to stay on the right side of the prevailing trend, introducing risk management when conditions deteriorate. As has been the case for all of 2024 and into 2025, the Catastrophic Stop model is positive, and we are aligned with the message. If our models shift to bearish levels, we will raise cash.
This strategy utilizes measures of price, valuation, economic trends, monetary liquidity, and market sentiment to make objective, unemotional, rational decisions about how much capital to place at risk and where to place that capital.
If you would like to discuss any of the above or our approach to investing in more detail, please don’t hesitate to schedule a call or webinar. Please call Tyler Hagan at 941-330-1702 to arrange a convenient time.
I hope you have a wonderful week,
Sincerely,
Donald L. Hagan, CFA
Chief Investment Strategist, Partner, Co-Founder
Charts with models and return information use indices for performance testing to extend the model histories, and they should be considered hypothetical. Charts courtesy Ned Davis Research (NDR). © Copyright 2025 NDR, Inc. Further distribution is prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers, refer to www.ndr.com/vendorinfo.
Disclosures
S&P 500 Index – An unmanaged composite of 500 large capitalization companies. This index is widely used by professional investors as a performance benchmark for large-cap stocks.
S&P 500 Total Return Index – An unmanaged composite of 500 large capitalization companies. This index is widely used by professional investors as a performance benchmark for large-cap stocks. This index assumes reinvestment of dividends.
Sentiment – Market sentiment is the current attitude of investors overall regarding a company, a sector, or the financial market as a whole.
MSCI Mexico Index – Is designed to measure the performance of the large and mid-cap segments of the Mexican market. The index covers approximately 85% of the free float-adjusted market capitalization in Mexico.
Price-to-earnings (P/E) ratio – A valuation metric that compares a company’s stock price to its earnings per share (EPS) to determine if a stock is expensive or cheap. It’s calculated by dividing the current stock price by the EPS, which is calculated by dividing the last 12 months of earnings by the weighted average shares outstanding.
MSCI Canada Index - Is designed to measure the performance of the large and mid cap segments of the Canada market. The index covers approximately 85% of the free float-adjusted market capitalization in Canada.
MSCI China Index - Captures large and mid-cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). The index covers about 85% of this China equity universe. Currently, the index includes Large Cap A and Mid Cap A shares represented at 20% of their free float adjusted market capitalization.
S&P 500 Consumer Discretionary – Comprises those companies included in the S&P 500 that are classified as members of the GICS consumer discretionary sector.
S&P 500 Consumer Staples – Comprises those companies included in the S&P 500 that are classified as members of the GICS® Consumer staples sector.
S&P 500 Communication Services - Comprises those companies included in the S&P 500 that are classified as members of the GICS® communication services sector.
S&P 500 Energy - Comprises those companies included in the S&P 500 that are classified as members of the GICS® energy sector.
S&P 500 Financials - Comprises those companies included in the S&P 500 that are classified as members of the GICS® financials sector.
S&P 500 Healthcare - Comprises those companies included in the S&P 500 that are classified as members of the GICS® health care sector.
S&P 500 Industrials - Comprises those companies included in the S&P 500 that are classified as members of the GICS® industrials sector.
S&P 500 Information Technology – Comprised of those companies included in the S&P 500 that are classified as members of the GICS information technology sector.
S&P 500 Materials - Comprises those companies included in the S&P 500 that are classified as members of the GICS® materials sector.
S&P 500 Real Estate - Comprises those companies included in the S&P 500 that are classified as members of the GICS® Real Estate sector.
S&P 500 Utilities - Comprised of those companies included in the S&P 500 that are classified as members of the GICS utilities sector.
Disclosure: The data and analysis contained herein are provided "as is" and without warranty of any kind, either express or implied. Day Hagan Asset Management, any of its affiliates or employees, or any third-party data provider shall not have any liability for any loss sustained by anyone who has relied on the information contained in any Day Hagan Asset Management literature or marketing materials. All opinions expressed herein are subject to change without notice, and you should always obtain current information and perform due diligence before investing. Day Hagan Asset Management accounts that Day Hagan Asset Management or its affiliated companies manage, or their respective shareholders, directors, officers, and/or employees, may have long or short positions in the securities discussed herein and may purchase or sell such securities without notice. Day Hagan Asset Management uses and has historically used various methods to evaluate investments which, at times, produce contradictory recommendations with respect to the same securities. The performance of Day Hagan Asset Management’s past recommendations and model results is not a guarantee of future results. The securities mentioned in this document may not be eligible for sale in some states or countries nor be suitable for all types of investors; their value and income they produce may fluctuate and/or be adversely affected by exchange rates, interest rates, or other factors.
There is no guarantee that any investment strategy will achieve its objectives, generate dividends, or avoid losses.
For more information, please contact us at:
Day Hagan Asset Management
1000 S. Tamiami Trail, Sarasota, FL 34236
Toll-Free: (800) 594-7930
Office Phone: (941) 330-1702
Websites: https://dayhagan.com or https://dhfunds.com
© 2025 Day Hagan Asset Management
