Market Momentum Shifts as Inflation Concerns Ease
The S&P 500 has just experienced its most impressive week since the November election, driven by a cooler-than-expected inflation reading that alleviated concerns about potential interest rate hikes. The index surged over 3%, while the tech-heavy Nasdaq Composite rose more than 2.6%, and the Dow Jones Industrial Average led the gains with a nearly 4% increase.
A Brief Respite Ahead of Trump’s Inauguration
Markets will take a breather on Monday, as they close for the Martin Luther King Jr. holiday. All eyes will be on President-elect Donald Trump’s inauguration, with investors closely monitoring his tariff and tax policies and their potential impact on American corporations.
Economic Calendar: A Light Week Ahead
The economic calendar is relatively light, with updates on activity in the services and manufacturing sectors, as well as consumer sentiment, slated for release. Meanwhile, 43 S&P 500 companies are expected to report quarterly results, including Netflix, United Airlines, Johnson & Johnson, and 3M Company.
Trump’s Impact on the Markets
During his first term, Trump viewed the stock market as a barometer for his administration’s success. Many investors expect that Trump will remain sensitive to a pullback in US stocks during his upcoming term. Rallies across certain “Trump trades” like small caps, energy stocks, and financials have had fits and starts leading into the inauguration, setting the stage for what many believe will be a theme of the stock market in 2025.
Volatility Ahead
Julian Emanuel, who leads the equity, derivatives, and quantitative strategy team at Evercore ISI, predicts a more volatile year ahead, with the S&P 500 finishing 2025 at 6,800, or about 13% higher than current levels. Emanuel argues that Trump’s administration will bring a continued swing between “risk on” and “risk off” sentiment among investors.
Fed Rate Cut Expectations
A cooler-than-expected inflation reading for December eased fears of Fed rate hikes, with Bank of America Securities senior US economist Aditya Bhave noting that the report “trims the tail risks of a hike.” Markets are currently pricing in a range of one to two Fed rate cuts this year.
Earnings Season Kicks Off
Fourth-quarter earnings season kicked off last week with reports from the nation’s largest banks, with largely better-than-expected results. FactSet data shows the S&P 500 is now pacing for 12.5% year-over-year earnings growth this quarter. Earnings season will continue this week, with 43 S&P 500 companies reporting, headlined by large-cap tech giant Netflix.
Policy Noise and Uncertainty
As Trump takes office, policy noise and uncertainty are expected to increase, with a number of executive orders reportedly planned. Markets will need to contend with building fiscal, trade, and monetary policy uncertainty, even if earnings reports are solid.
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