This Week's Key Financial Catalysts

An early weekly market update this week as I take my 16-, 14-, and 10-year-olds snowboarding for the first time this weekend with a drive to Redding, California Friday. The past week in financial markets has been marked by significant developments in inflation data and the start of the Q4 earnings season, two pivotal drivers shaping investor sentiment. These factors provided a nuanced picture of the current state of the global economy and financial markets, eliciting a mix of optimism and caution among market participants, as well as maybe an overdue bounce in equities from oversold levels.

Inflation Data: Easing but Persistent Concerns

Inflation trends remained a focal point throughout the week, with key data releases offering some relief while underscoring lingering challenges. On Monday, rising oil prices and the New York Federal Reserve’s Survey of Consumer Expectations stoked fears about higher inflation persisting longer than anticipated. Oil prices surged 3.6% to $78.99 per barrel, a move that often signals potential inflationary pressures due to its impact on transportation and production costs. The survey revealed stable one-year-ahead inflation expectations at 3.0%, but three-year-ahead expectations ticked up from 2.6% to 3.0%, highlighting concerns over entrenched inflation.

Tuesday brought some respite with the release of December’s Producer Price Index (PPI) data. While the month-to-month readings of 0.2% was below expectations, indicating easing inflationary pressures, the year-over-year numbers painted a less favorable picture. PPI rose 3.3%, up from 3.0% in November, and core PPI, excluding volatile food and energy prices, remained steady at 3.5%. Treasuries reacted favorably, with the 10-year yield settling two basis points lower at 4.79%, reflecting investor relief over the month-to-month improvements.

The inflation narrative took a more optimistic turn on Wednesday with the release of the December Consumer Price Index (CPI) report. The data showed a decline in the year-over-year rate for core CPI from 3.3% to 3.2%, sparking a rally in equity markets. The S&P 500 climbed 1.8%, trading above its 50-day moving average at one point, though it closed just below this key technical level. Treasuries also responded positively, with the 10-year yield falling 14 basis points to 4.65%, its lowest level in weeks. However, while the monthly readings offered hope, the broader reality of inflation still running above the Federal Reserve’s 2% target tempered enthusiasm.

By the end of the week, mixed signals persisted. December retail sales data suggested cautious consumer behavior, with sales rising 0.4% month-over-month but missing expectations. Weekly jobless claims came in at 217,000, underscoring a robust labor market. To summarize the economic concerns, the Federal Reserve’s target of sustained inflation below 2% remains elusive, keeping the path of monetary policy uncertain; however, on Thursday Fed Governor Waller said that there could possibly be 3-4 rate cuts this year, depending on the data.

Earnings Reports: Strong Financial Start to Q4 Earnings

Corporate earnings were the other major storyline of the week, offering a lens to the health of various sectors amid an evolving economic landscape. Banking giants led the earnings season, delivering a mix of robust performance and cautious guidance.

On Wednesday, JPMorgan Chase, Wells Fargo, and Goldman Sachs reported better-than-expected results, buoying investor sentiment. JPMorgan beat estimates by $0.72 per share and projected net interest income of approximately $90 billion for 2025, as balance sheet growth offset lower rates. Early in the week, JP Morgan CEO Jamie Dimon said in an interview that he is “cautiously pessimistic” about the US economy. Goldman Sachs delivered an impressive beat of $3.74 per share, reflecting strength across its business lines. These results provided a boost to the broader equity market, with financial stocks outperforming. Wells Fargo beat estimates for earnings but revenues came under expectations. The financials are being seen by analysts as having favorable trading conditions and overall a healthier market for merger & acquisitions (M&A) and initial public offerings (IPOs).

The optimism continued Thursday with strong earnings from Bank of America and Morgan Stanley. Bank of America exceeded estimates by $0.05 per share, while Morgan Stanley delivered a substantial beat of $0.52 per share. Bank of America was down on the day while Morgan Stanley was higher at the time this article was written.

UnitedHealth also reported earnings, but its results were met with a negative response, reflecting investor concerns over its guidance and broader health sector dynamics. Earlier in the week, UnitedHealth had responded positively to new the U.S. proposed a 4.3% increase to Medicare Advantage plan payments, a $21 billion boost according to Bloomberg.

Earnings from retail giant Target and semiconductor leader Taiwan Semiconductor Manufacturing (TSM) added further color to the week’s corporate landscape. Target raised its fourth-quarter comparable sales guidance and reaffirmed its earnings outlook, reflecting strong holiday sales. TSM’s results exceeded expectations and the company issued strong guidance for Q1. Strength in the semiconductor space Thursday was a result of TSM’s earnings despite news China is investigating US chip companies for alleged dumping.

Notable Corporate News

The week also saw notable corporate developments. Monday, Apple announced plans to introduce new iPhones and artificial intelligence features, fueling anticipation for its product roadmap. It was also reported this week that Microsoft paused hiring in its US consulting unit to cut costs.

Lululemon Athletica raised its fourth-quarter guidance, signaling strong demand in the premium apparel segment. However, Moderna slashed its fiscal year 2025 revenue outlook, leading to a sharp 16.8% drop in its stock price.

Tesla faced regulatory scrutiny as the Securities and Exchange Commission filed a lawsuit against CEO Elon Musk over alleged disclosure violations related to his stake in Twitter. Meanwhile, Meta reacted to reports that the TikTok ban enforcement might be suspended.

Chart of the Week

The CRB Index is a commodity index, heavily weighted by oil. The weightings are 39% energy, 41% agriculture, 7% precious metals, and 13% basic metals. I track the index to get an idea where commodity prices and inflation may be headed. The index recently brokeout to a new 52-week high this week on mainly the strength I’ve been seeing in oil prices. While short-term momentum indicators point towards an overbought condition with a Relative Strength Index (RSI) at 74 and a Moving Average Convergence/Divergence (MACD) near previous highs, the oversold condition coupled with the breakout is a good sign overall for commodities prices, but might not help the inflation narrative.

Market Implications and Outlook

The interplay between inflation data and corporate earnings shaped a week of cautious optimism in financial markets. The easing of inflationary pressures, as indicated by the CPI and PPI data, provided a tailwind for equities and bonds, fostering hopes the Fed may be able to further cut rates this year. However, the persistence of inflation above the Fed’s target kept investors wary, particularly as oil prices and long-term inflation expectations edged higher.

Corporate earnings, while largely positive, highlighted sector-specific challenges and opportunities. The financial sector’s strong performance underscored the benefits of higher interest rates on net interest income, while technology and consumer-facing companies showcased varying degrees of resilience after hearing from Target and Taiwan Semi. A consensus is building on a broadening of earnings growth from a handful of magnificent-7 stocks to other companies in 2025. FactSet reported last week that the S&P 500 is likely to report the highest earnings growth in three years at 11.7% for Q4. Given most companies often beat estimates, this number could be lower than actual results which FactSet believes could be 14%.

Looking ahead, the trajectory of inflation and the Federal Reserve’s policy response will remain critical drivers for markets. Investors will closely monitor upcoming data releases and corporate earnings for further clues about the health of the economy and the potential for sustained market growth after a stellar 2024.

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