Key Takeaways
- Markets Face Pressure As Tariffs Spark Inflation And Earnings Drive Volatility.
- Trade War Escalates With Tariffs On Canada, Mexico, And China.
- Earnings Show Profit Growth, But Revenue Expansion Remains Limited.
Markets are coming off a week of modest losses with the Nasdaq Composite down the most at 1.5%. The S&P 500 and Russell 2000 each lost 1%, while the Dow Jones Industrial Average was relatively unchanged. This week is filled with more earnings and economic data. However, new tariffs implemented on Saturday by the Trump Administration sent futures plummeting when they opened for trading on Sunday night.
President Trump enacted 25% tariffs on goods arriving from both Canada and Mexico, as well as a 10% tariff on China. The Canadian tariffs do have a carve out for energy imports which will only see a 10% tariff. In response, Canada announced their own 25% tariff on over $100 billion U.S. goods. As of this writing, Mexico has not announced how they will respond, but according to an article in The Wall Street Journal, Mexican officials are considering carousel retaliation by which the products hit with tariffs would rotate. What is effectively a trade war comes at a tenuous time. While inflation appears to be under control, the Federal Reserve has recently become less doveish with respect to interest rate cuts. The next Federal Reserve Open Market Committee (FOMC) meeting doesn’t take place until March 19th and currently, the overwhelming expectation is that rates will be left unchanged. Whether or not the effects of the tariffs will be quantifiable by then remains to be seen; however, it is anticipated they will increase inflationary pressures.
Turning to earnings, we’re just over one-third of the way through reporting season. Of the companies that have reported, 77% have beaten estimates. According to FactSet, the blended earnings growth rate (based on those companies that have reported and estimates from those that will report) is 13%. If there is a caveat to this, it’s the blended growth rate for revenues, which is just 5%. That suggests profits are more a result of lower costs and/or greater efficiency than it does more goods are actually being sold. This is something to keep an eye on as 131 more companies will report this week.
Of the companies that will report, some highlights include: Advanced Micro Devices and Alphabet, after the close tomorrow. Uber and Disney are scheduled to announce before the open Wednesday. Then later in the week we’ll hear from ARM Holdings, MicroStrategy and Amazon.
The economic calendar is also crowded this week with JOLTS coming before the open tomorrow and on Friday, the monthly employment number for January. We also have members of the Fed speaking all week and in light of the newly enacted tariffs, I think these speeches will take on added importance. Also, while it’s not a number I typically discuss, on Wednesday we will get reports on Imports, Exports and the Trade Balance for December. Part of the reasoning for the Trump tariffs was related to perceived trade imbalances. Therefore, I think these reports could garner more attention than usual. I don’t know that any changes in the number vs. prior months is particularly important, but I think the number itself will be a baseline used to gauge effectiveness of tariffs moving forward.
For today, I’m watching the automakers. The implementation of tariffs is a major threat to this group as a whole and I’m interested in how they respond. Related to that, I’m also interested if we see a divergence between the S&P and Nasdaq. With so many car manufacturers in the S&P, we could see more turbulence in that index than we do in the tech heavy Nasdaq. Lastly, I’ll be watching food companies, especially those who are heavily reliant on imports such as sugar or avocados. As always, I would stick with your investing plan and long-term objectives.
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