By Jack Kraft, CFA, Vice President, Investment Strategist
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U.S. equity markets ended the week mixed as investors digested a slew of earnings reports, economic data and geopolitical news. The Dow Jones outperformed, finishing the week up 0.3%, while the S&P 500 declined 1.0%. The Nasdaq Composite lost 1.6% as investors continued to question the artificial intelligence (AI) premium following China’s DeepSeek AI rollout. Markets were caught in customs as news of tariffs on Mexico, Canada and China sparked volatility on Friday, West Texas Intermediate Crude Oil set weekly losses, and gold finished above $2,800/ounce.
The big news hitting the markets last week was President Trump signing an executive order to impose tariffs on imports from Mexico, Canada and China—a move that could be a taxing situation for investors. The administration has said that the tariffs are conditional on combating immigration and fentanyl, but no specific guidelines have been given. The tariffs are set to go into effect on February 4 and included a “retaliation clause” to dissuade countries from similar measures on U.S. exports. Despite this, Canada has already announced retaliatory tariffs of 25% on $155 billion of American goods, while some provinces declared the removal of U.S. goods—such as liquor—from shelves. According to Goldman Sachs, the tariffs are estimated to be inflationary, acting as an economic toll that could put slight upward pressure on core personal consumption expenditures and weigh on gross domestic product (GDP) growth by roughly 0.4%. Given the negative impacts of a trade war with our allies to the north and south, this is being seen as more of a negotiation tactic rather than an attempt to reduce the deficit.
As trade uncertainty persists, markets are likely to be more volatile in the short-term, but the long-term is measured by companies’ earnings, which look to remain upbeat. Fourth-quarter earnings season is off to a strong start with roughly 35% of the S&P 500 Index having issued fourth-quarter results. Of those companies, 77% have reported positive earnings per share (EPS) surprises, according to Factset. The fourth-quarter blended year-over-year earnings growth rate for the S&P 500 is 13.2%, and if this holds, it will mark the highest earnings growth rate reported since 2021.
Management commentary has been bullish, with companies like Visa and Mastercard pointing to a “healthy and strong U.S. consumer,” which helped lift payment stocks last week. Meanwhile, big tech offered some reassurance on capital expenditures for AI development, with Meta forecasting $60-$65 billion in investments and Microsoft reaffirming its $80 billion outlay for 2025. Despite this, Microsoft’s results disappointed as weaker-than-expected cloud guidance raised concerns about AI’s return on investment. With Alphabet and Amazon set to report earnings this week, the market will be closely watching for further clarity on AI spending trends.
Elsewhere, the U.S. Federal Reserve (Fed) held interest rates steady at 4.25-4.50% in its latest meeting, marking a shift to a “wait and see” approach after three consecutive rate cuts in late 2024. This pause reflects the Fed’s ongoing concerns about inflation, which has dropped from over 9.0% in 2022 to below 3.0%, but has recently stalled above the 2.0% target. Meanwhile, the economy remains resilient, with GDP growth exceeding the long-run 2.0% average in nine of the past 10 quarters and unemployment still historically low. The Fed will closely monitor inflation trends, while also assessing potential shifts in fiscal and trade policy under the new administration, including tariffs, immigration and stimulus measures.
The meeting was perceived as more hawkish from the central bank’s previous stance, typically a bearish catalyst, but markets largely shrugged it off. Powell reiterated that the central bank is not in a hurry, but policy remains restrictive at current levels. Most market forecasters now expect the Fed to resume easing monetary policy by mid-year, provided inflation continues to ease. Despite more uncertainty on the rate front, the 10-year yield has edged lower year-to-date, while stocks have managed to notch gains amid a broadening out in market performance. However, the Magnificent Seven are off to a mixed start in 2025, with Nvidia, Apple, Microsoft and Tesla all in the red. Investors seem to be taking a more cautious approach to the AI investment theme this year following the emergence of China’s low-cost DeepSeek platform.
The week ahead will be busy as traders will have no shortage of economic and earnings reports. Headlining the earnings calendar will be mega caps Alphabet and Amazon. Semiconductors and the artificial intelligence trade will also be in focus with Advanced Micro Devices, QUALCOMM, Arm Holdings and Palantir Technologies all issuing fourth-quarter profit results. Other notable companies reporting include: PayPal, Uber, Chipotle, Ford, Disney, PepsiCo, Hershey, ConocoPhillips, Eli Lilly, Amgen and Merck & Co. to name a few. The first week of the month also means notable economic data, with updates on Institute for Supply Management manufacturing and services data, both of which are expected to show a print in expansionary territory (above 50). On Friday, nonfarm payrolls are expected to show job growth of 175,000, while unemployment is forecasted to remain stable at 4.1%. Rounding out the calendar will be Fed-speak from several presidents and governors throughout the week.
Economic Calendar February 3 – February 7
Time (ET) | Report | Period | Median Forecast | Previous |
MONDAY, FEB. 3 | ||||
9:45 AM | S&P final U.S. manufacturing PMI | Jan. | — | 50.1 |
10:00 AM | Construction spending | Dec. | 0.30% | 0.00% |
10:00 AM | ISM manufacturing | Jan. | 50 | 49.30% |
12:00 PM | Atlanta Fed President Raphael Bostic speaks | |||
TBA | Auto sales | Jan. | — | 16.8 million |
TUESDAY, FEB. 4 | ||||
10:00 AM | Job openings | Dec. | 8.1 million | 8.1 million |
11:00 AM | Atlanta Fed President Raphael Bostic speaks on housing | |||
2:00 PM | San Francisco Fed President Daly speaks | |||
WEDNESDAY, FEB. 5 | ||||
8:15 AM | ADP employment | Jan. | — | 122,000 |
8:30 AM | U.S. trade deficit | Dec. | -$95.0B | -$78.2B |
9:00 AM | Richmond Fed President Tom Barkin speaks | |||
9:45 AM | S&P final U.S. services PMI | Jan. | 52.8 | |
10:00 AM | ISM services | Jan. | 54.40% | 54.10% |
1:00 PM | Chicago Fed President Goolsbee speaks | |||
3:00 PM | Fed Governor Michelle Bowman speaks | |||
THURSDAY, FEB. 6 | ||||
8:30 AM | Initial jobless claims | Feb. 1 | 213,000 | 207,000 |
8:30 AM | U.S. productivity | Q4 | 1.50% | 2.20% |
2:30 PM | Fed Governor Christopher Waller speaks | |||
5:10 PM | Dallas Fed President Lorie Logan speaks | |||
FRIDAY, FEB. 7 | ||||
8:30 AM | U.S. employment report | Jan. | 175,000 | 256,000 |
8:30 AM | U.S. unemployment rate | Jan. | 4.10% | 4.10% |
8:30 AM | U.S. hourly wages | Jan. | 0.30% | 0.30% |
9:25 AM | Fed Governor Michelle Bowman speaks | |||
10:00 AM | Wholesale inventories | Dec. | -0.50% | -0.20% |
10:00 AM | Consumer sentiment (prelim) | Jan. | 71.8 | 71.1 |
3:00 PM | Consumer credit | Dec. | $16.4B | -$7.5B |
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market