Earnings & Fed & Trump, Oh My!

Weekly Newsletter: January 27, 2025 “The song remains the same.” Whether referencing Trump 2.0 or earnings, not much has changed. From instituting 20%+ tariffs to no comment to maybe some, it is becoming clear that tariff talk is (right now) more bluster than action as it was during his first term. Earnings season has been coming in better than expected, but that too is fairly normal with over 70% of companies regularly beating estimates. Of course, chatter on the direction of interest rates is picking up as the Fed is set to meet mid-week and likely leave rates alone. A month ago, projections were for a cut at this meeting. However, with stronger economic data and still elevated inflation, the markets are now pricing in status quo. That has not stopped the bulk of strategists calling for at least two cuts to rates during 2025. If the data and inflation remain relatively strong, it will be hard to justify cutting. For now, same ol’, same ol’.

Earnings season turns up the heat this week with many of the big-tech names releasing their results. Many are hoping Netflix is a precursor to blow-out numbers from the other mega-cap names. Subscriber growth was robust and they were able to bump up the monthly subscription charge, leading to a big earnings beat. Guidance is important on Wall Street, so even for companies that report good revenue/earnings numbers if they are more downbeat about coming quarters, the stock is likely to take it on the chin. Outside of the Fed meeting this week, their favorite inflation report personal consumption expenditures (PCE) is released. Based on estimates, the year-to-year growth in this inflation report is expected to rise a bit, putting additional pressure on the Fed’s ability to cut rates. If there is any consolation on inflation it is that the first quarter last year saw rates running 3-5% annualized. IF this year comes in modestly lower, the annual inflation data would look better.

After rising for much of December, rates have moderated a bit in January, lending some support to a better equity market. Even though the Fed may keep rates unchanged, it will be Powell’s press conference following that could move rates in either direction. Concern over inflation getting to their target could upend the markets and push rates higher. A slow/steady approach may calm fears and rates could move lower. Higher commodity prices over the past month could keep the Fed on its heels.

The markets have gone from rather dour to excited quickly. Investor sentiment jumped back onto the bullish side after hitting multi-month lows in late December. Volume has picked up during the advance and participation has been broad, with even small and mid-cap stocks beating the SP500. The new all-time high in the SP500 also means that valuations once again are hitting nosebleed territory and 30 times earnings. Earnings are expected to rise by 5% during this reporting season. Even with that increase, valuations are at 29 times those earnings. Full-year earnings growth is expected to be 20%, which implies that economic growth will be robust for 2025. Assuming that is correct, it might also call into question the Fed’s ability to cut rates during the year. The markets are being priced for another Goldilocks year of declining inflation, good economic growth, and a Federal Reserve that will remain accommodative. That could be a tough target to hit.

The Fed meeting will be a non-event. However, Chair Powell’s press conference following will be interesting to watch. His comments may set the table for the direction of rates through the remainder of the year. Markets are hoping for some guideposts to look for in the data in the months ahead.

The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.