Equity markets trended higher as last week came to a close.
The S&P 500 was up +1.5%, the NASDAQ 100 gained 2.5%, and U.S. small caps (Solactive 2000) rose +0.2% for the week. In Europe, the Stoxx 50 outperformed the United States, up +3.3%, its best weekly finish in a month.
In commodities, gold rose +2.6%, reaching all-time highs and headed for its best weekly streak of gains in five years.
In macro news, producer and consumer prices increased more than markets expected last week. That drove a temporary spike in yields, but they ended the week slightly lower. The 2-year (4.27%) was down 3 basis points, and the 10-year (4.48%) was lower by 1 basis point.
The most important implication from the firmer-than-expected price data is that it likely means the Fed will be on hold through the first half of this year. With the Fed out of the picture, what will drive markets from here?
Last week’s price data suggests that inflation picked up in the United States.
The headline CPI consumer measure, which includes food and energy, rose 0.5% month-over-month, exceeding the 0.3% consensus estimate. The core CPI measure, excluding food and energy, increased 0.4% month-over-month, also above the 0.3% expectation. Year-over-year, these figures reached 3.0% and 3.3%, respectively. Producer prices, which measure the price of input goods and services, also rose above consensus expectations.
What do the prints tell us?
The inflation data suggests that inflation is not making the same progress as it was six months ago. Importantly, we can gauge core PCE, the Fed’s favored inflation measure, with the data we have in hand. Since much of the price increases were in items outside those that feed into PCE, both reports suggest a 0.3% increase in core PCE prices.
While this is cooler than the 0.4% rise in CPI, it still probably means the Fed will keep rates steady for the next few meetings. The labor market is still solid and inflation progress is slowing. The Fed still views its current policy rate as restrictive (and so do we), which suggests policy rates are likely to move lower in the longer run. It will just be at a more gradual pace.
Investors have become accustomed to the Fed being a driving force in market moves. Over the last two years, the Fed’s decisions have matched market pricing leading up to each meeting. Now, the market anticipates the Fed to stay on hold until October, meaning the Fed is likely out of play for the next few months. So what will investors focus on?
Corporate earnings
This earnings season is well underway, with ~75% of companies having reported fourth-quarter figures. Reports indicate a strong earnings season. S&P 500 earnings growth looks like it will come in at 16.75% year-over-year in the fourth quarter, well above the 11.5% consensus at the start of the season. If this rate holds, it will be the highest reported growth since Q4 2021 and the sixth consecutive quarter of year-over-year earnings growth.
One of our preferred sectors, financials, is leading the way with the highest year-over-year earnings growth rate of all 11 sectors: ~52%. We believe M&A and capital markets activity could continue to thaw, acting as a tailwind for the sector.
While there is broad corporate enthusiasm for deregulation and a more business-friendly administration, tariff uncertainty is acting as a headwind.
According to FactSet’s natural language processing tool, 184 companies (about 50% of those reporting) have mentioned tariffs during earnings calls. As more companies report, we are likely to breach the 2018 trade war highs in the number of companies focused on tariffs.
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