Tariffs, Economic Data, and Earnings

1. A Busy Week. Investors had a lot of moving pieces in financial markets last week. The week started with fears regarding a slowdown in growth from the tariffs on Canada, Mexico, and China. Sell-side research was proclaiming increased inflation, declining GDP, and increased unemployment, among other negative connotations. By market close on Monday, deals were struck with both Canada and Mexico, postponing the tariffs one month, while the 10% tariffs on China remain. But in a Friday press conference, Trump stated that he plans to announce reciprocal tariffs on many more countries so that “we are treated equally with other countries”.[1] It is still unknown which countries and products will be affected, but ideas have floated that they may be focused on automobiles or a broad 10% tax on every imported good.

On the economic front, January’s ISM Manufacturing reading came in at 50.9, the first time we have received an expansionary reading in 26 months. The print is a good leading indicator for the level of economic activity in the manufacturing sector. The onshoring and reshoring of manufacturing, plus enhancement to the power grid and data center buildout are all industrial and manufacturing themes we see as major growth drivers for the U.S. economy across the coming years. January’s nonfarm payroll report did not meet estimates but was a reminder that the soft-landing narrative is still intact. The economy added 143K jobs in January, with revisions higher for December to the tune of over 50K. The unemployment rate ticked down 0.1 percentage points to 4.0% and hourly earnings rose 4.1% y/y – a positive sign for continued consumer resiliency.

Chart 1: In 2024, Job Creation Averaged 168K/Month, and Initial Jobless Claims Averaged 223K/Week, Both Below 10-Year Averages of 154K and 369K Respectively.

2. Q4 Earnings Update. As of February 7^th, 62% of the S&P 500 have reported earnings. 77% of companies that have reported have beaten earnings estimates, and 63% have beaten revenue estimates. Overall, the current y/y blended earnings growth rate is 16.4% which would be the highest growth rate since Q4 2021 if it holds through the end of the reporting season. Over 80% of communication services, technology, financial, and healthcare companies have beaten estimates, with real estate and utilities the laggards at 50% and 20% respectively. Earnings have broadened away from technology, which has been a benefit for the market; financials and healthcare are the two best-performing sectors year-to-date, both up nearly 7%.

Many companies we follow have reported solid results. Eli Lilly (LLY) saw gross margins increase by 90 basis points (bps) to 83.2% and grew earnings 113% y/y. Revenues were up 45% y/y, with Mounjaro and Zepbound as their leading products. Zepbound revenues grew 52% q/q and 984% y/y, proof as to why LLY is the number one player in the GLP-1 space. Amazon’s (AMZN) AWS is now a $115 billion annual run rate business with expanding retail margins domestically and internationally. The company is also expanding and taking share in advertising, with revenues up 18% y/y to $17.8 billion. AMZN is a top player in generative AI and increased its capital expenditure guidance to over $100 billion in 2025.

3. Fixed Income. U.S. Treasuries were mixed across the curve last week, as the 2-year yield rose 9 bps, and the 10-year yield fell 4 bps. This resulted in the 2s10s curve flattening 13 bps to +21 bps, levels last seen in mid-December 2024.

Despite increased risk sentiment in the rates and equity markets, credit spreads remain firm. Investment grade credit spreads tightened 1 bp to +116 bps, while high yield spreads remained unchanged at +302 bps. Credit ratings deteriorated last week as the main rating agencies issued 30 downgrades and 29 upgrades; consumer discretionary had the most downgrades, while industrials had the most upgrades. Tax-exempt yields fell across the curve with yields falling 2-8 bps.

4. The Week Ahead.

Earnings – Monday: INCY, MCD, ON, ROK, VRTX; Tuesday: ACGL, CARR, CINF, DD, ECL, EW, FIS, GILD, HUM, KO, LDOS, MAR, MAS, SMCI, SPGI; Wednesday: AIG, AIZ, BIIB, CME, CSCO, CVS, D, EQIX, ES, EXC, GNRC, IPG, KHC, MGM, MLM, NI, PAYC, SW, WAB, WAT, WELL; Thursday: ABNB, AEP, ALB, AMAT, CBRE, DE, DLR, DTE, DUK, DVA, DXCM, FRT, GDDY, GEHC, GPN, HWM, IRM, MCO, MSI, PANW, PCG, PPL, ROL, RSG, TAP, TYL, VTR, WMB, WST, WYNN, ZBRA, ZTS; Friday: AEE, IR, MRNA.

Economics – Tuesday: NFIB Small Business Index; Wednesday: CPI, Hourly Earnings, Average Workweek; Thursday: Continuing Claims, Initial Claims, PPI; Friday: Export Prices, Import Prices, Retail Sales, Industrial Production, Business Inventories.

Stephanie Link’s TV Schedule:

Return for Selected Indices^[2]

Sources:

^[1] Source: Reuters. As of February 7, 2025.

^[2] Source: Bloomberg. As of February 10, 2025.

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