Navigating the Final Stretch of Earnings Season

As we approach the end of the fourth-quarter earnings season, over three-quarters of the S&P 500 companies have already reported their results. This period has been marked by strong performance, with 76% of these firms surpassing earnings expectations. The attention is now on NVIDIA, the last of the Magnificent 7 tech giants, which includes Microsoft, Meta Platforms, Amazon, Apple, Alphabet, and Tesla, set to release its earnings on February 26. The S&P 500 saw a 1.5% increase for the week, with the Magnificent 7 outperforming with a 2.1% gain, likely buoyed by positive market sentiment following President Trump’s announcement on reciprocal tariffs, which has been seen as a more measured approach than immediate implementation.

Robust Earnings Growth Across Key Sectors

The fourth-quarter earnings season has showcased strong growth across several sectors, with the financial sector leading the pack, expected to deliver the highest year-over-year growth rate in the S&P 500. Communications services and consumer discretionary sectors are also performing well, reflecting a rebound in consumer confidence and spending. However, the energy sector has struggled, with earnings expected to decline by almost 28%, likely due to volatile oil prices and shifting consumer behavior towards renewable energy sources.

The blended earnings growth rate for the S&P 500 has outperformed expectations, currently standing at 16.9% year-over-year, surpassing the initial estimate of 11.9%. This strong performance is attributed to better-than-expected results from financials, communication services, and consumer discretionary sectors. Additionally, sales growth remains robust, supported by a 5% year-over-year nominal GDP growth, which combines real GDP growth with inflation. This bodes well for companies looking to maintain or expand their revenue streams in the coming quarters.

Inflation Shows Resilience, But Hope for Easing

The consumer price index (CPI) for January came in hotter than expected, rising to a 3% year-over-year rate, driven by increases in used cars, airfares, and auto insurance premiums. Inflation has recently accelerated, with the 3-month annualized rate reaching 4.9%, prompting concerns about its impact on consumer spending and economic growth. However, there is optimism that inflation could ease in the coming months, supported by stabilizing prices in volatile components such as energy and food, and slowing housing inflation.

Despite a strong month-over-month gain in services inflation, the year-over-year rate excluding housing has declined to 4%, indicating that inflation in the services sector may be starting to moderate. If this trend continues, it could alleviate some of the pressure on the Federal Reserve to maintain its aggressive rate-hiking stance. Markets will closely monitor these inflation trends, as they remain a key driver of monetary policy decisions.

Consumer Spending Shows a Temporary Slowdown

January retail sales data revealed a slowdown in consumer spending, following a strong finish to 2023. While December retail sales were revised higher, January’s numbers showed a broad-based spending hangover, which could be attributed to several factors, including natural disasters and a post-holiday spending pullback. Despite this pause, the labor market remains a bright spot, with continued job growth expected to support consumer spending in the coming months.

The Atlanta Federal Reserve has trimmed its first-quarter GDP growth estimate to 2.3% from 2.9%, reflecting the weaker-than-expected retail sales data. However, this growth rate is still healthy and far from recessionary levels. Additionally, the easing in economic growth estimates has helped bring down the 10-year U.S. Treasury note yields, which had spiked following the hotter-than-expected inflation reading.

What to Watch in the Coming Days

With fewer meaningful economic data releases on the horizon, and many impacted by natural disasters, the Federal Reserve meeting minutes on Wednesday will be closely watched for insights into the timing of the next rate cut. The Fed is expected to remain on the sidelines until at least mid-year, when it might resume short-term interest rate cuts, contingent on inflation and economic growth trends.

Earnings season continues, albeit at a slower pace, and investors will be keeping an eye on any remaining corporate reports. President Trump’s active policy announcements have kept markets on edge, but participants appear to be adapting to the new administration’s rhythm. One of the highlights of the week will be Berkshire Hathaway’s earnings release and Warren Buffett’s highly anticipated annual letter on Saturday. Buffett’s insights and portfolio adjustments are always closely monitored by investors, and this year’s letter is expected to provide valuable perspectives on the market and economic landscape.

Balancing Growth and Challenges

The current economic landscape is a delicate balance of growth and challenges. While earnings have been robust, driven by strong performances in key sectors, inflation remains a wildcard that could influence both consumer behavior and monetary policy. The pause in consumer spending, while temporary, serves as a reminder of the sensitivity of economic activity to various external factors, including natural disasters and macroeconomic conditions.

Looking ahead, markets will need to navigate a complex environment, with policy uncertainty, inflation trends, and earning results all playing a role. The Federal Reserve’s next moves will be critical, as they seek to balance the need to control inflation with supporting economic growth. Investors will also be closely monitoring corporate earnings for signs of strength or weakness, particularly in sectors that are sensitive to interest rates and consumer spending.

Ultimately, the key to navigating this landscape will be staying informed and adaptable. With earnings season winding down and economic data releases becoming less frequent, the focus will shift to macroeconomic trends and policy decisions. By keeping a close eye on these developments, investors and market participants can better position themselves for success in the coming weeks and months.

Key Takeaways

• Earnings Season Strong Finish: The majority of S&P 500 companies have reported strong earnings, with 76% exceeding expectations. NVIDIA is the last of the Magnificent 7 to report.
• Sector Performance: Financials, communications services, and consumer discretionary sectors are leading earnings growth, while energy lags.
• Inflation Trends: CPI rose to 3% year-over-year, driven by used cars, airfares, and auto insurance. Services inflation shows signs of moderation.
• Consumer Spending: January retail sales slowed, but job growth is expected to support future spending.
• Federal Reserve and Policy: The Fed is expected to pause rate hikes until mid-year. The meeting minutes will provide insights into future policy decisions.
• Berkshire Hathaway and Buffett: Investors await Buffett’s annual letter for market insights and portfolio updates.

The interplay of earnings, inflation, consumer spending, and policy will continue to shape the economic and market outlook in the coming weeks.