After a rocky start to the year, U.S. equity markets delivered the strongest weekly gain since the post-election rally in November 2024 in last week’s trading. A favorable read on inflation was the biggest driver of last week’s gain as the cooler than expected report took some pressure off of the sharp rise in interest rates from September’s lows. For the week, the S&P 500 and Nasdaq Composite surged 2.9% and 2.5%, respectively, while the Dow Jones posted the best returns with a 3.7% advance. The positive momentum has carried into this week’s early trading as investors turn their attention to the return of President Trump to the White House and the ramp of fourth quarter earnings season.

Following several week’s of strengthening economic growth and labor market data, investors were braced ahead of last week’s December CPI inflation report with fears of signs of another upside inflation surprise. Market participants had all but priced out potential for rate cuts in 2025, and the 10-year Treasury yield had risen as high as 4.80% from the low in mid-September of around 3.60%. However, the highly watched CPI report came in better than feared as core inflation (excluding food and energy prices) grew 3.2% year-over-year in December compared to the consensus forecast of 3.3%. The report showed a notable decrease in core service price pressures, which has been the primary sticking point holding inflation above the Fed’s 2% target. Additionally, last week’s report on producer prices (PPI) also surprised to the positive as core PPI grew 3.5% year-over-year against expectations of 3.8%.

The friendly inflation report sparked a rally in bonds and stocks as interest rates dropped. Market rate cut expectations have moved back to 1 to 2 cuts in 2025 with a 26% probability of a cut in March, according to the CME FedWatch Tool. Meanwhile, the 10-year Treasury yield has pulled back to 4.57%. There remains a ways to go yet to get to the Fed’s inflation target and one month doesn’t constitute a trend, but it was a well-received step in the right direction.

However, the outlook for inflation in the years ahead is cloudy at best when trying to digest the net impact of the sharp policy changes from President Trump, who issued a rapid flurry of announcements and executive orders out of the gate following yesterday’s inauguration. Among the many announcements, market participants keyed in on the incremental news on tariffs, immigration, and energy policy. While there had been reports that President Trump may pursue a more gradual implementation of tariffs to build negotiating leverage, he made comments last night from the Oval Office that he was considering 25% tariffs on Canada and Mexico as soon as February 1st, citing the flow of illegal immigrants and drugs as a driving factor. Canada and Mexico accounted for about a third of US imports and exports last year. Meanwhile, President Trump also ordered sweeping changes to U.S. energy policy aimed at reducing environmental restrictions and boosting U.S. drilling. These two instances would have countervailing impacts on inflation with tariffs boosting prices for domestic consumers while expanding energy production would add oil supply and reduce energy prices.

Corporate earnings season will also be increasingly top of mind for investors in the week ahead as the number of companies reporting fourth quarter results ramps up. Last week’s kick-off from several large financial institutions started out on a positive note as several banks highlighted improved business sentiment, stable credit conditions, and resilient consumer spending. This week’s reporters will include a host of blue-chip giants like Netflix, Proctor & Gamble, Johnson & Johnson, Verizon, and more.