🔍 The focus this week: US earnings season

In case you haven’t noticed, the fourth-quarter earnings season is officially underway, with companies starting to open their books, one after another. And this round of recommended reading is particularly crucial: after the US stock market’s strongest two-year rally since the dot-com bubble, corporate results will serve as a key test of whether stock valuations have outpaced reality.

Analysts estimate that S&P 500 companies' earnings grew by 11.7% in the fourth quarter compared to the same period last year, which would mark the fastest pace of expansion since late 2021. The actual growth rate could be even higher, considering that most S&P 500 companies typically report results above forecasts. In fact, the actual earnings growth rate has outpaced estimates in 37 of the past 40 quarters. FactSet, for example, calculates that, based on the average earnings “beats” in recent years, the S&P 500’s latest results could show earnings growth of 14% to 19%.

Those kinds of numbers would certainly invigorate the bulls. And while these growth percentages are undeniably lofty, the earnings season has already started on a strong note, with several major banks reporting better-than-expected results last week. The key question for investors now is whether the bulk of the market’s momentum remains concentrated among a few heavyweight tech companies or whether it begins to broaden out. Analysts seem to believe it’s the latter: they expect S&P 500 firms, outside of the “Magnificent Seven”, to report a third straight quarter of earnings growth, with profits estimated to rise 4%, and then quickly accelerate toward double-digit increases, according to Bloomberg.

Finally, investors will be paying close attention to companies’ outlooks for this year – especially with a new US president taking office. On one hand, promises of tax cuts and deregulation could boost profits. But on the other, steep tariff increases and a stronger dollar could weigh them down.

📅 On the calendar

• Monday: China loan prime rate announcements.
• Tuesday: UK labor market report (November), eurozone economic sentiment (January). Earnings: Netflix, 3M.
• Wednesday: Earnings: Procter & Gamble, Johnson & Johnson, Abbott Laboratories, GE Vernova.
• Thursday: Japan trade balance (December), eurozone consumer confidence (January). Earnings: GE Aerospace, Intuitive Surgical.
• Friday: Japan inflation (December), Bank of Japan interest rate announcement, global PMIs (January), US consumer sentiment (January). Earnings: American Express, Verizon.

👀 What you might’ve missed last week

US

• A key inflation measure was cooler than expected.
• The president-elect is reportedly considering a softer approach to tariffs.

Europe

• UK inflation slowed unexpectedly.
• And the UK’s economic growth fell short of forecasts.

Asia

• China’s trade surplus broke a record.
• The world’s second-biggest economy grew more than forecast.

✍️ What does all this mean?

Investors have become increasingly worried that America’s labor market is almost too strong – and likely to keep the heat on the economy’s stubborn inflation. Fortunately, they got a sliver of good news on Wednesday, with data showing that US consumer prices increased by 2.9% in December from a year ago. That marked the third straight month of rising inflation, sure, but it matched economist forecasts. And the core inflation measure – which strips out volatile food and energy items to give a better idea of price pressures – unexpectedly dipped to 3.2%.

President-elect Donald Trump’s proposed tariff plans added to inflation concerns, including his proposed 10% to 20% levy on all imports and a hefty 60% tax on goods from China. Such measures would send consumer prices higher – and that was already rattling markets, with stocks and bonds sliding together recently. But word had it last week that members of the new administration are discussing slowly ramping up tariffs month by month instead. The hope is that the gradual approach would boost the US’s negotiating leverage while avoiding a sudden spike in inflation.

UK inflation unexpectedly cooled for the first time in three months in December, prompting traders to pencil in more interest rate cuts this year and calming market concerns about the country’s soaring borrowing costs. Consumer prices increased by 2.5% last month from a year ago, down from November’s 2.6% pace and defying economist expectations for an unchanged reading.

Britain’s economy expanded ever so slightly in November but fell short of analyst expectations. Data showed the economy grew by 0.1%, after shrinking by 0.1% in both September and October. Still, the result was below forecasts for a 0.2% expansion and did little to ease concerns that the country might be teetering on the edge of “stagflation” – a dreaded mix of low growth and high inflation.

An outpouring of goods from Chinese factories sent the country’s trade surplus to an all-time high of $992 billion last year – a 21% increase from 2023. The surge was driven by both record exports and weak imports, as Chinese consumer spending faltered and commodity prices slipped. Notably, last year’s export record came despite falling prices, highlighting a huge rise in sheer volumes.

China’s economy grew by a better-than-expected 5.4% last quarter compared to the same period a year earlier, boosted by the broad stimulus measures unleashed by authorities in September. The figures meant that the world’s second-biggest economy expanded by 5% in 2024. While that was slightly better than forecast, it trailed 2023’s growth of 5.2% and was the lowest since 1990 (excluding years distorted by the coronavirus pandemic).

Stay classy ✌️

Your Finimize Analyst team