Hello and happy Sunday to everyone!

It’ll be another holiday shortened week and given the pace of new developments on both the political and economic front lately, it could make for a volatile Tuesday at the open. Let’s take a look back at the week that was and the week that could be.

What We're Talking About This Week!

• Quick Hits For The Week Ahead

• Dividend Landscape

• Top 10 List

• Looking Ahead

Quick Hits For The Week Ahead

Among the major events that took place last week:

• 25% tariffs on steel & aluminum with blanket tariffs in the future

• Another hotter than expected CPI reading that will be trouble for the Fed

• The first real big disappointment in retail sales in at least a year

• A large-cap resurgence

• Are rate hikes back in the conversation?

The Large-Cap Resurgence: Equities shake off some important warning signs

You’d think that an inflation report that showed CPI is not only rising, but rising at a faster rate, and a retail sales report that showed a big month-over-month drop would trigger some selling in equities. Instead, we got the exact opposite reaction. The S&P 500 was up 1.5% and the Nasdaq 100 gained 2.9%.

Obviously, there’s more that goes into it than just two reports. The market has enjoyed a largely positive Q4 earnings season. Growth rates from the magnificent 7 names have cooled from their AI era peak (in fact, tech earnings have been pretty mixed, especially from the mag 7), but the rest of the market has been picking up the slack, which is part of the reason we’re seeing market gains broadening out here.

I think the inflation report is the more consequential of the two. Headline inflation is back to 3% and it’s looking like the rate may hold steady around this level until late spring/early summer when it could pick up again. Long-term, I think this could result in a valuation contraction for some of the biggest tech names. With the AI earnings boom definitely cooling down, it’s probably time to start looking elsewhere for opportunities.

Dividend stocks starting to get the breadth to make a sustained run

Dividend stocks are still outperforming the S&P 500 this year by a narrow margin, but sustainability has been a problem. The biggest sectors that would traditionally be fueling a dividend stock rally have been mixed and that’s resulted in a sideways-trending pattern relative to the S&P 500.

In recent weeks, however, that looks like it’s changing. Healthcare has been choppier, but it’s still leading. Consumer staples are finally starting to pick up. Real estate is rebounding. The fact that all of this is happening even as the S&P 500 is hitting new highs 1) confirms the broadening out that we talked about earlier and 2) could be a sign that there’s more caution here than is being indicated by the major averages.

I’m probably higher on dividend stocks here than many, but I do believe we’re going to need to see some of these catalysts - inflation, tariffs, interest rates - start to be taken a little more seriously, i.e. deeper risk-off sentiment, before we see wider outperformance from this group. I think the catalysts are there and some improved fundamentals should add an assist over the next couple quarters.

Will the Fed be cutting in 2025 or not?

The market has been banking on Fed rate cuts for some time. The premise that they were going to cut a half dozen times when GDP growth was at 3% and the unemployment rate was 4% was ridiculous on its face. The current expectation of 1-2 cuts by year-end in order to moderate somewhat from the Fed’s more restrictive stance seems more reasonable, although I’m starting to grow more skeptical that even this will happen.

If inflation keeps trending in the direction that it has been over the past four months, I find it difficult to believe that the Fed is going to cut rates. Powell has even said so himself. With tariffs adding another layer of uncertainty and another catalyst that could push inflation rates higher, I don’t think it’s out of the question that the Fed will need to hike before it cuts again.

Right now, I’d still rate this as unlikely and think at least another couple months of data is needed before this becomes a real possibility. I do, however, think the market is pricing in a near zero chance of a rate hike in our future. I think the odds are substantially higher than that and we could see a really negative reaction if that starts to get realized.

Dividend Landscape

I touched on dividend stocks earlier, so I don’t think there’s much reason to rehash all of that here. I am generally bullish on this group, but I do think there needs to be greater risk-off sentiment before we can talk about real outperformance potential.

Given inflation and tariff concerns, I’d be inclined to go the safer route here. That means dividend growth and dividend quality strategies before high yield. I’m even a little skeptical of quality strategies here given their over-reliance on the tech sector. The Capital Group Dividend Value ETF (CGDV), for example, has taken advantage of some looser criteria to overweight some of the mag 7 names (including those that didn’t even pay dividends at the time) to lead the dividend ETF category. Traditional dividend growth leans more heavily into the defensive sectors that are positioned to do a little better moving forward.

Top 10 List

Let’s take a look at a handful of ETFs worth highlighting:

Invesco S&P 500 Equal Weight Communication Services ETF (RSPC)

In case you hadn’t noticed, Facebook stock has risen for the past 20 consecutive trading days! But it’d be a mistake to say that it’s been driving the sector. RSPC is performing almost on par with the Communication Services Select Sector SPDR ETF (XLC), its cap-weighted counterpart, indicating that there’s strength in this sector across the board.

WisdomTree Europe Quality Dividend Growth ETF (EUDG)

Eurozone stocks have been the big winners so far in 2025. Austria, Finland, France, Germany, Italy, the Netherlands, Spain, Sweden and Switzerland are all up at least 10%. However, I’m still worried about the fragile nature of the recovery and Trump’s potential targeting of Europe with tariffs. Therefore, for investing in Europe, I’d prefer to tilt towards quality and defensive sectors, both of which are provided by EUDG.

Roundhill Sports Betting & iGaming ETF (BETZ)

This was one of last week’s best-performing ETFs and has gained 15% on the year. It’s obviously beneficial that the Super Bowl is the biggest betting day of the year, but this sector’s success has gone beyond that. Earnings have been especially strong in this category in Q4, which positions it well for further gains.

VanEck India Growth Leaders ETF (GLIN)

For nearly two years, India had been the go-to country for positive returns within the emerging markets group, but the story has completely fallen apart. Slowing growth and re-emergent inflation have stifled optimism for the future and this ETF has fallen more than 20% from its late 2024 high.

SPDR S&P Retail ETF (XRT)

The 0.9% decline in month-over-month retail sales was the biggest in nearly two years. Consumer spending has been the backbone of the current expansion and any result, such as this, should be taken seriously. But I don’t think we need to overreact yet. Retail sales growth in the several months leading up to this one have been consistently positive and there was a big decline in the same January reading last year.

iShares AAA-A Rated Corporate Bond ETF (QLTA)

Investment-grade corporate credit isn’t the best-performing fixed income category this year, but I think it represents a good balance between Treasuries, which are susceptible to the current inflation trend, and junk bonds, which look overpriced and vulnerable to a pullback. I’d still stick with the higher rated bonds in this group given current uncertainty.

Vanguard Ultra Short Bond ETF (VUSB)

Ultra-short bond ETFs continue to rake in a lot of money despite fluctuating interest rates. VUSB currently ranks #8 in my ultra-short bond ETF rankings, but even that, in my opinion, doesn’t give it enough credit. It’s one of the cheapest in the space, more impressive considering the fund is actively-managed, and has a pretty diverse mixture of holdings.

Fidelity Total Bond ETF (FBND)

Sticking in the fixed income category, this is just a good reminder that if you want complete diversification within a single bond fund, FBND would be your choice. It’s one of the rare few that combines investment-grade and junk bonds in a single portfolio. Plus, it’s got a modest international allocation and is spread almost evenly across the government, corporate and securitized bond categories.

Vanguard 0-3 Month Treasury Bill ETF (VBIL) & Vanguard Ultra-Short Treasury ETF (VGUS)

These two funds were just launched by Vanguard, VBIL offering exposure to 0-3 month T-bills and VGUS offering exposure to 0-12 month T-bills. Think of them as comparable to the iShares 0-3 Month Treasury Bond ETF (SGOV) and the iShares Short Treasury Bond ETF (SHV), only cheaper.

BattleShares TSLA vs. F ETF (ELON)

Yes, an ETF with this ticker was probably inevitable. This new launch from Defiance is 2x Tesla stock and -1x Ford. Essentially, the net effect is being long Tesla stock with a bet that Ford will underperform. Is it a structure that will work or gain investor interest? I’m skeptical. It seems a little too gimmicky to me.

Looking Ahead

Looking better for: TIPS, utilities, dividends

Looking worse for: growth, industrials, junk bonds

If you have any more thoughts, feel free to jump into the comments below!