Strong Earnings Season Overshadowed by Trump Policy Focus
The fourth quarter earnings season has begun promisingly, but its significance may be overshadowed by the market's attention to President Donald Trump's return to office and his initial executive orders.
"Earnings are currently a secondary influence on the stock market, with policy taking center stage," notes Callie Cox, chief markets strategist at Ritholtz Wealth Management.
Trump's policies have driven market activity, as seen in the US dollar index's largest one-day drop in a year following Trump's lack of major tariff action on his first day.
Subsequently, stocks rallied, with industrials and materials benefiting from dollar weakness. Tech stocks also surged on news of a potential $500 billion investment in artificial intelligence infrastructure.
While Trump's policies dominate investor attention, the underlying fundamentals for stocks remain solid. S&P 500 earnings growth for the quarter is now projected at 12.5%, exceeding last week's 11.5% estimate and marking the best growth rate in over three years.
Analyst estimates have also been surpassed, with companies beating both sales and earnings forecasts witnessing a 3.34% outperformance of the S&P 500 on the following day.
However, Citi US equity strategist Scott Chronert cautions that positive earnings momentum alone may not suffice to buoy markets. Uncertainty surrounding fiscal, trade, and monetary policy could create volatility, especially with over 90% of S&P 500 companies set to release earnings after Trump's inauguration.
"Companies are likely to provide conservative guidance amid these uncertainties," Chronert states.
Strategists emphasize the importance of assessing the long-term impact of Trump's policies on the economy and corporate earnings. Even a favorable outlook today could change if Trump alters his stance.
"With so much noise, investors should focus on economic and earnings trends, which are currently stable," Cox advises. "However, future direction remains uncertain due to policy uncertainties."