Tariffs, AI, and a Big Week of Earnings

Week in Review

The month of January felt like it lasted a year with the volume of news flow. The U.S. economy continues to display robustness with a growth rate of 2.3% in the fourth quarter. This week saw four of the "Magnificent 7" companies release their earnings, bolstering an already strong corporate earnings season. As anticipated, the Federal Reserve kept interest rates unchanged this week, while core Personal Consumption Expenditures (PCE) remain above the 2% target, and the rate of disinflation has decelerated.

In the short term, economic growth may experience a slowdown as consumers, particularly those in lower-income brackets, potentially reduce discretionary spending. However, we do not foresee a recession. On the contrary, we anticipate growth may reaccelerate in the latter half of the year, spurred by potential interest rate cuts from the Fed and pro-growth policies like deregulation and tax cuts.

Last week, corporate earnings saw momentum with key reports from the "Magnificent 7." Apple, Microsoft, and Meta exceeded expectations for both earnings per share and revenue, while Tesla fell short on both fronts. Interestingly, Tesla's shares rose, fueled by optimism surrounding a favorable regulatory landscape, the introduction of more affordable models, and advances in autonomous vehicles, including the Robotaxi1.

This broader earnings growth has catalyzed a shift in market leadership. Over the past six months, the financial and industrial sectors have each outperformed the technology sector. Notably, the S&P 500 has had a robust start to the year, climbing approximately 3.9%, even as the technology sector has dipped by 1.1%. We foresee market performance continuing to diversify beyond tech-centric stocks, such as those in the Magnificent 7.

The Federal Reserve's Federal Open Market Committee (FOMC) wrapped up its January meeting this week, maintaining the federal funds rate target range at 4.25%-4.5%. The Fed is adopting a measured approach to easing monetary policy amidst strong economic growth, a resilient labor market, lingering inflation, and policy uncertainties. The core PCE, the Fed's preferred measure of inflation, has eased to 2.8% from its peak of over 5% in 2022 but remains above the Fed’s 2% target, as the pace of disinflation has slowed.

Economic & Earnings Calendar

Next week promises a wealth of significant economic updates and fourth-quarter earnings reports. About 25% of S&P 500 companies are set to unveil their earnings, making it a critical period for investors and analysts alike.

The week kicks off on Monday with earnings reports from Palantir Technologies and Tyson Foods. A slew of major releases follows on Tuesday, featuring Advanced Micro Devices, Alphabet, Chipotle Mexican Grill, PayPal Holdings, PepsiCo, Pfizer, and Spotify Technology.

Wednesday brings earnings announcements from Arm Holdings, Ford Motor, Novo Nordisk, Qualcomm, Uber Technologies, and Walt Disney. On Thursday, the spotlight shifts to Amazon.com, ConocoPhillips, Eli Lilly, Expedia Group, Honeywell International, Linde, and Philip Morris International. Closing out the week on Friday, Cboe Global Markets and FirstEnergy will share their results.

In addition to these corporate updates, important economic data is also anticipated. The Bureau of Labor Statistics will release the January jobs report on Friday, with economists projecting the addition of 165,000 nonfarm payrolls and a steady unemployment rate of 4.1%. Earlier in the week, on Tuesday, the BLS will publish the latest Job Openings and Labor Turnover Survey.

Quick Thoughts on Tariffs & AI: The launch of Deepseek's new AI model could substantially influence the AI space by setting new benchmarks in areas such as natural language processing and image recognition, potentially increasing competition and accelerating innovation among AI companies. Improved efficiencies and capabilities might emerge, leading to more sophisticated and accessible AI-driven solutions.

Meanwhile, the imposition of a 25% tariff on goods from Canada and Mexico under the Trump administration could disrupt trade flows, increase costs for U.S. industries dependent on North American imports, and lead to higher consumer prices, consequently affecting economic relationships and possibly prompting shifts in supply chains. The additional 10% tariffs on Chinese goods could further strain trade relations, elevate costs for businesses and consumers, and potentially encourage diversification away from reliance on Chinese imports.

Additional economic indicators to watch include the Institute for Supply Management's Manufacturing Purchasing Managers’ Index for January, which will be released on Monday, followed by the Services PMI on Wednesday. Finally, the University of Michigan will issue its Consumer Sentiment Index for February on Friday, providing further insights into the economic outlook.

Chart of the Week: Inflation vs Interest Rates

Disclaimer: The author of this blog is a financial advisor but may not be the right advisor for you. In fact, the author may not even be the right advisor for themselves. Please consult a qualified professional before making any financial decisions based on the content of this blog. And remember, just because the author has a fancy title and a briefcase full of spreadsheets, doesn't mean they know what they're doing.