Weekly Investment Perspective

Despite continued headline volatility around tariffs and trade tensions and a hotter than expected consumer inflation report, U.S. equity markets managed to push higher last week amid a rebound in technology stocks. For the week, the S&P 500 closed just shy of its all-time high following a 1.5% gain while the Dow Jones and the tech-heavy Nasdaq returned 0.7% and 2.6%, respectively. Overseas, international stocks built on their solid year-to-date momentum with the MSCI All Country World ex-US index gaining 2.5% last week.

Last Tuesday’s ugly reading of January CPI briefly spooked markets and triggered a sell-off in U.S. stocks and bonds as investors further dialed back 2025 rate cut expectations. Core CPI rose by 0.45% in January, the highest monthly gain since spring of 2023, and the year-over-year inflation rate accelerated to 3.3%, which was well-above the consensus expectation of 3.1%. Some of the largest culprits in the upside surprise were shelter prices, up 0.4% in January and 4.4% year-over-year, and a seasonal increase in insurance premiums. Meanwhile, energy prices also ticked higher and food prices felt the sting of surging egg prices, which rose 50% over the past year and 15.2% in January alone due to bird flu. Overall, the report included lots of seasonal and one-time factors that contributed to the exaggerated increase. Still, it was the fifth disappointing core CPI reading in the past six months and increases the odds of no cuts this year.

Another factor keeping the Fed on hold on rates is the uncertainty of the impact of President Trump’s aggressive tariff policy alongside other material policy initiatives that the new administration has launched out of the gate. Last week, Trump imposed 25% tariffs on all imported steel and aluminum and asked the Commerce Department to investigate current trade relations and proposing reciprocal tariffs on a country-specific basis. Meanwhile, the Department of Government Efficiency, led by Elon Musk, has also been gathering headlines amid aggressive actions to cut government jobs and spending. In response to the tariff headlines and policy volatility, the January reading of the NFIB small business Uncertainty Index spiked by 14 points to 100, the third highest reading on record.

While the policy and inflation outlook remain foggy, corporate earnings appear to have the wind at their back following a strong close to 2024. According to FactSet, the S&P 500 is tracking towards 16.9% earnings growth year-over-year in the fourth quarter with nearly 80% of index members’ results in the book. That compares to expectations for 11.9% growth at the end of last year and represents the best performance since the fourth quarter of 2021. Some of the main drivers of the upside have been margin expansion and broadening earnings growth outside the Magnificent 7. However, the forward looking guidance for 2025 broadly has been more mixed as executives have tried to bake in some conservatism to account for foreign exchange headwinds from U.S. dollar strength and trade uncertainty overhangs. As a result, the 2025 S&P 500 earnings growth outlook has come down to 12.5% from closer to 15% at the start of the year.

In the week ahead, investors will get an updated look on the state of the U.S. consumer with reports on housing activity and consumer sentiment. Additionally, retail-giant Walmart is on the docket to report earnings this week with several more large retailers slated to report next week that will give further insight on consumer spending, inflation, and the potential impact from tariffs.