Key themes from U.S. Q4 earnings season

Transcript

hi welcome to Market weekend review for the weekending February 7th 2025 I'm Paul edman Chief investment strategist for North America here at Russell Investments and um yeah I'm recording this uh at the end of the day Thursday uh here in Seattle ahead of the always important nonform payrolls data for the month of January but at least so far this week has been a good week for investors to be in the market where we're seeing modestly positive returns for both equities and bonds through Thursday's close in the United States under the surface of that three things have stood out to me um this week first is around um how the fourth quarter earning season is tracking I'd say there um the main message is one of strength where we're continuing to see robust uh fundamental performance for the Us corporate sector but arguably even more important than that um that fundament earnings growth is starting to broaden out um where it's no longer just driven by the large Mega cap technology stocks anymore um the so-called S&P 493 uh and the Russell 2000 Index have also transitioned back um to positive earnings growth here now in the fourth quarter and I think that idea of fundamental resilience and broadening if it can continue uh could uh support a potential broadening out of equity market performance over the course course of 2025 as well and so I think that's going to be a key watch Point uh for investors in the quarter ahead the second key observation for me this week came around us trade policy over the weekend and into Monday morning there was a lot of investor anxiety around president Trump's proposal to put in place large tariffs against the United States's three largest trading partners being Canada Mexico and China of those three uh we only had tariffs actually get implemented against China um and those 10% tariffs by our estimation will only have very modest effects onto US growth and inflation going forward we think our outlook for resilient growth and moderating inflation um is still on track even with um these policy changes for Canada and Mexico president Trump allowed for a 30-day pause uh around uh the trade negotiations so um obviously there's still a layer of uncertainty here could those tariffs come back again in March uh might the US Administration pursue new trade actions against Europe um and this idea of trade policy uncertainty is going to continue to linger U both for investors and Us corporate sector going forward but at least in the very short term um that significant concern uh resolved uh largely in the favor of a measured action for the time being around us trade policy which provided some relief uh towards the end of Monday's trading session in the United States uh supporting risk markets uh third and finally for me this week is around Global monetary policy we did have uh a bank of England meeting this week where they decided to cut rates by a quarter of a percent I'd say across most of the developed Market central banks right now were still in an easing cycle some of them are going a little bit slower uh such as here in the United States with the Federal Reserve given the strength of the US business cycle some of them are going a little bit faster such as the European Central Bank given uh some of the economic weakness uh there in the region but most central banks are still cutting interest rates again we saw that uh with the UK this week our expectation going forward is that um the bank of England is very likely to continue cutting interest rates potentially even a little bit more than uh what is currently priced into the for curve and on the back of uh that view uh my colleagues in London are seeing um good value in the UK guilt curve um at these um yield levels so those were the key takeaways for me I think we're seeing earnings resilience uh a lot of volatility and ups and downs around uh us trade policy but at least so far not enough in terms of policy changes to meaningfully reshape uh the Outlook and then uh for Global central banks including the bo e a continuation of uh rate Cuts uh with our assessment being some good value in the UK curve um that's it for me this week um please uh stay tuned next week for our next session of market weeken review Thanks a Lot hi I'm Sophie Anto head of portfolio and business Consulting at Russell Investments if you liked what you just saw and heard consider subscribing to our YouTube channel or check us out on LinkedIn thanks for tuning in

Executive summary:

U.S. Q4 earnings growth is broadening out beyond the tech sector
Uncertainty remains around U.S. trade policy
The Bank of England announced a 25-bps rate cut

On the latest edition of Market Week in Review, Senior Director and Chief Investment Strategist for North America, Paul Eitelman, discussed the main themes from U.S. fourth-quarter earnings season. He also provided an update on U.S. trade policy and recent announcements from global central banks.

Is U.S. earnings growth broadening out to other sectors?

Eitelman began with a look at how U.S. fourth-quarter earnings season is shaping up now that over half of S&P 500 companies have reported results. “So far, it’s been a season of strength, with a continued robust performance from the corporate sector,” he said. Of arguably even more importance is the fact that earnings growth is starting to broaden out beyond mega cap technology companies, Eitelman added. As evidence, he noted that both the Russell 2000 Index of small cap stocks and the so-called S&P 493—which excludes the Magnificent Seven group of tech stocks—have transitioned back to positive earnings growth for the fourth quarter.

Eitelman said that if earnings growth remains resilient and continues to expand to other sectors, this could support a broadening out in equity-market performance over the course of 2025. “This will be a key watchpoint for investors to pay attention to next quarter,” he remarked.

U.S. implements tariffs on China, pauses plan to tax Canadian and Mexican imports

Shifting to U.S. trade policy, Eitelman noted that the first few days of February were marked by uncertainty in markets due to the Trump administration’s proposal to implement tariffs on the country’s three largest trading partners—Canada, Mexico, and China.

Markets traded higher on Feb. 3 after U.S. President Donald Trump announced a 30-day delay in imposing tariffs on Canada and Mexico in order for negotiations to continue, Eitelman said. The U.S. did proceed with imposing a 10% tariff on Chinese imports the next day, he added. However, Eitelman said he expects these tariffs to only have very modest effects on U.S. growth and inflation moving forward.

He noted that a level of uncertainty remains around U.S. trade policy, as it’s unclear if the U.S. will implement tariffs on Mexico and Canada after the 30-day pause ends. In addition, it’s also possible that the new U.S. administration could pursue tariffs against the European Union, Eitelman said.

“Ultimately, I expect this theme of trade-policy uncertainty to continue to linger moving forward, both for investors and for the U.S. corporate sector,” he remarked.

Rate-cutting cycle continues for key central banks

Eitelman finished with a review of the latest rate decisions from global central banks. He noted that on Feb. 6, the Bank of England (BoE) became the latest developed-market central bank to announce a 25-basis-point (bps) rate cut, joining the European Central Bank and the Bank of Canada, which each slashed rates by a quarter-percentage-point last week.

“The BoE’s decision is reflective of the broader rate-cutting trend that is still continuing in most developed markets,” Eitelman stated, noting that some central banks are moving at different paces. This includes the U.S. Federal Reserve (Fed), he said, which opted to skip a rate cut at its January meeting after lowering rates by a cumulative 100 bps in the final months of 2024.

Eitelman explained that the Fed is easing at a slower rate due to the strength of the U.S. business cycle, while the ECB is lowering rates somewhat faster due to a weaker economy. The Bank of England, meanwhile, is confronting both an uptick in inflation and a weakening jobs market, he said.

Because of this, Eitelman expects the BoE to continue cutting rates—potentially even a little more than current market pricing suggests. “On the back of this view, we do see some good value in UK government bonds,” he concluded.

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