Key Takeaways
- Earnings Growth Strong, But Energy Sector Struggles Amid Overvaluation Concerns
- AI Investments Face Scrutiny As Amazon Misses Earnings Expectations
- Trade Wars Escalate With New Tariffs Impacting Global Markets
Stocks were little changed last week. The S&P 500 was almost flat while the Nasdaq Composite fell 0.5%. The Russell 2000 was also flat, and the Dow Jones Industrial Average fell 0.4%. We’re now over 60% of the way through earnings season, though we do still have some big names this week. It’s also a week of important economic data and week three of an escalating trade war.
With 62% of the S&P 500 already having reported, it appears as though we’re on track for earnings growth of 16.4%. If that holds, it will be the strongest quarter since the fourth quarter of 2021. Most sectors have notched strong gains; however, the one sector performing worst is the energy sector, down double digits on a year-over-year basis. Even with the overall stellar growth rates, on a fundamental level, stocks remained overvalued with the 12-month forward-looking price-to-earnings ratio sitting at 22.1.
I think one theme we are seeing this quarter is an increasing demand for a return on investment in the Artificial Intelligence (AI) buildup. Last Thursday, Amazon became the latest victim to that demand when its earnings in the AI segment of the business came in below forecasts. The company also announced plans for significant investment in AI. That combination sent shares lower by 4% on Friday. I believe investors are growing weary of the lack of profitability and I think this is something to keep an eye on as we move through the first quarter of this year.
Some of the companies reporting earnings this week include McDonalds, Coca-Cola, Lyft, Super Micro Computer, Cisco, John Deere, Applied Materials and Coinbase. McDonalds reported earnings this morning that came in below what most were expecting, but I suppose enthusiasm for Shamrock Shake season is building because those shares are higher by about 0.5%. Overall, I think this is a pretty interesting cross-section of the economy reporting this week. I’m especially interested in John Deere’s earnings in light of the escalating trade wars playing out around the world and China placing tariffs on American farming equipment.
Speaking of the trade war, on Sunday before the Super Bowl (though there was nothing “super” about it unless you are an Eagles fan), President Trump announced he will be placing 25% tariffs on all steel and aluminum imports. Already, Trump has hit Canada, Mexico and China with tariffs (though he agreed to suspend the Mexican and Canadian tariffs by a month). China has hit back with their own tariffs of 15% on $5 billion of U.S. energy imports. I think this is an economic story we’re going to need to closely monitor for the foreseeable future as it changes so often.
There are a few stocks I’m watching today. Meta Platforms has strung together fifteen consecutive days of gains, and I think it’s a fair question to ask how long this can last before we see some profit-taking. I’m also watching Tesla. Shares over the automaker are down 25% from their December high. In addition to those companies, I’m keeping an eye on both Cleveland-Cliffs and T-Mobile. With President Trump saying he won’t allow Nippon Steel to buy U.S. Steel, it reopens the potential for Cleveland-Cliffs to step in. Cleveland-Cliffs is up nearly 8% in premarket while shares of U.S. Steel are higher by 4%. Finally, shares of T-Mobile are indicated higher by almost 9% on news it will offer Starlink satellite service for $15 per month. The satellite service will virtually erase any dead spots of T-Mobile customers.
On the economic calendar, we have a few notable items. Federal Reserve Chairman Powell will testify before Congress on Tuesday and Wednesday. I would not be surprised if we hear from President Trump chime in during the testimony at some point, advocating for lower interest rates which is something he’s repeatedly said he wants. We’ll also get a couple key readings on inflation with Wednesday’s Consumer Price Index (CPI) number and then on Thursday, the Producer Price Index (PPI) is due out.
For today, I’m most interested in seeing if the market can hold its premarket gains. We’ve seen some weakness of late that’s erased early gains. I’m also closely watching Meta Platforms for profit-taking at some point. Overall, I’m curious if we see a somewhat quiet day in terms of volume as the Monday after the Super Bowl tends to be one of the least productive days of the year, despite last night’s trouncing of the Chiefs and a relatively boring game (again, not for you Philly fans). As always, I would stick with your investing plans and long-term strategy.
tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.