Market Update
Last week was quite an interesting week for the markets, as investors reacted to several different catalysts throughout the week. The AI trade saw a sharp pullback on Monday as investors initially panicked following the release of Deepseek, however the market recovered some of its losses later in the week as analysts downplayed the risks of Deepseek and company earnings for Q4 came in overall solid. On Friday, sentiment shifted again after the White House warned that former President Donald Trump planned to impose tariffs on China, Mexico, and Canada over the weekend, sending stocks lower and pushing the S&P 500 to close down 0.95% for the week. Despite the volatility driven by AI concerns and trade policy fears, two key macro events—the Fed's decision to keep rates unchanged and a PCE report in line with expectations—provided a stabilizing backdrop, reinforcing expectations for future rate cuts.
PCE
The Fed’s preferred inflation gauge remained subdued in December, reinforcing expectations for rate cuts this year. Core PCE, which excludes food and energy, increased 0.2% from November and 2.8% year-over-year. However, real disposable income barely grew for a second month, pushing the savings rate to a two-year low of 3.8%.
Core services prices (excluding housing and energy) rose 0.3%, consistent with prior months, while core goods prices dropped 0.24%, the largest decline in a year. Consumer spending remained strong, particularly in durable goods, possibly due to concerns over future price hikes linked to Trump’s proposed tariffs. Meanwhile, labor costs grew at their slowest pace since 2021.
Q4 Earnings Update
So far about 36% of S&P 500 companies have reported for Q4. 77% of companies have reported a positive earnings surprise, which is equal to the 5-year average. The Q4 year-over-year earnings growth rate for the S&P 500 is 13.2% currently. If 13.2% is the actual growth rate for the quarter, it will be the highest growth rate since Q4 2021. On average, companies have exceeded estimates by 5%, which is below the 5-year average of 8.5%. Investors are rewarding companies that have beat by more than usual, with the average company that beats seeing a price increase of 1.5% versus the 1% historical average. This is in contrast with last year, when investors typically rewarded beats less and punished companies who missed more on average. This may be because last year investors were more cautious about the economic outlook and are now much more optimistic.
Sources:
https://www.bea.gov/news/2025/personal-income-and-outlays-december-2024
