- Markets Resilient: The stock market had another strong week, with the S&P 500 reaching a new all-time high. A rally in Treasuries, postponed tariffs, and robust Q4 earnings contributed to positive sentiment, even as inflation data came in hotter than expected.
- Key Economic Data Mixed: Inflation surprised to the upside. Retail sales saw their biggest decline in two years, but this may be a seasonal pullback rather than a sign of consumer weakness.
- Cautious Optimism as Uncertainty Looms: Market drivers this week include earnings reports from major companies like Walmart and Alibaba, as well as key policy developments in Washington. Staying invested, diversified, and disciplined remains crucial in navigating the evolving landscape.
Looking Back
Despite some mixed economic data, the stock market delivered another solid week. U.S. equities gained nearly 2%, while non-U.S. stocks climbed more than 2%. Notably, the S&P 500 reached a new all-time high, reflecting continued investor confidence.
Several factors supported the market’s strength. While tariff uncertainty remains a concern, Thursday’s announcement of postponed “retaliatory tariffs” provided a market-friendly signal. Additionally, markets appear to be interpreting tariffs as more rhetoric than immediate disruption. A rally in Treasuries also contributed to positive sentiment, pushing the 10-year Treasury yield below 4.5%—marking its fifth consecutive week of gains, the longest streak since 2021. Furthermore, fourth-quarter earnings growth continues to improve, now reflecting a year-over-year gain of nearly 17%.
However, last week’s economic data was mixed, with inflation coming in hotter than expected. Both the Consumer Price Index (CPI) and the Producer Price Index (PPI) exceeded forecasts. Core CPI, which saw its biggest month-over-month increase since September 2022, reached levels (excluding the COVID era) not seen since 1992. Headline CPI registered at 3.0%, while Core CPI stood at 3.3%. Meanwhile, a key subset of inflation—often referred to as “Supercore” (which excludes food, energy, goods, and housing rents)—rose 0.8% in January, its fastest monthly increase in a year. Over the past 12 months, this category has increased 4.1%.
On the positive side, some underlying inflation components suggest that Core PCE, a key metric for the Federal Reserve, could moderate to 2.6% from 2.8% when the data is released on February 28. This would be a constructive development in the Fed’s inflation fight.
Retail Sales also saw their largest decline in two years, raising concerns about consumer spending. However, January has historically been a weak month for retail activity and given the strength of the consumer throughout the past year, this could be more of a reasonable seasonal pullback than a sign of broader weakness.
Another notable trend is the continued decline in the U.S. dollar, which is down in 2025 and well off its late-2024 highs. A weaker dollar typically supports economic growth by improving export competitiveness and reducing import costs. It has also been a tailwind for international equities, which are outperforming U.S. stocks so far this year.
Looking Ahead
This will be a holiday-shortened week with a relatively light economic calendar. Key reports include consumer sentiment, manufacturing data, and minutes from the Federal Reserve’s January meeting. Early 2025 economic indicators, while still showing growth, have been somewhat softer, with first-quarter GDP now forecasted (according to the GDPNow model) to be 2.3% from 2.9%. The question remains: Will this moderation in economic momentum impact corporate earnings for the first quarter?
As for the fourth-quarter earnings season, which is now nearly 80% complete, another 10% of S&P 500 companies will report this week. Among the most closely watched reports will be Walmart and Alibaba, the latter of which is up nearly 40% year-to-date. Currently, the blended year-over-year earnings growth rate for the S&P 500 stands at 17%. If that holds, it will represent the strongest earnings growth since Q4 2021. That said, companies are issuing more negative earnings guidance than positive, suggesting that the road ahead may be less smooth.
The most significant market drivers this week, however, will likely come from Washington. Key developments to watch include Senate budget and Commerce votes, ongoing discussions around a potential government shutdown (with the current continuing resolution expiring on March 14), and further trade policy news.
Update on Investor Sentiment
Interestingly, a rise in investor caution could actually be a tailwind for the market. The latest American Association of Individual Investors (AAII) Sentiment Survey revealed the highest level of bearish investors since November 2023. Historically, when sentiment turns this cautious, markets have tended to deliver above-average returns over the following months.
Closing Thoughts
Despite some concerning economic headlines, stock and bond markets have remained resilient. However, ongoing geopolitical and economic uncertainty is likely to bring more volatility in the weeks and months ahead. As new policies are announced and implemented, investors should prepare for market fluctuations.
In this environment, we continue to believe that cautious optimism remains the most prudent approach. Staying invested, diversified, and disciplined remains the key to long-term success.
As always, if you have any questions, we are here to help you navigate the path forward. Please feel free to contact us at strategists@brinkercapital.com or at rusty@orion.com. Thank you for your time and trust.