Earnings, Fed Watching, And Warren Buffett’s Annual Letter Ahead

Earnings season is nearing the finish line, with over three-quarters of the fourth-quarter earnings season complete. The pace of earnings releases eases to 45 S&P 500 companies scheduled to report. 76% of S&P 500 firms reported better-than-expected earnings for the quarter. Only one of the Magnificent 7, NVIDIA (NVDA), is left to release earnings on February 26. The Magnificent 7 consists of Microsoft (MSFT), Meta Platforms (META), Amazon.com (AMZN), Apple (AAPL), NVIDIA (NVDA), Alphabet (GOOGL), and Tesla (TSLA).

The S&P 500 rose 1.5% for the week, with the Magnificent 7 outperforming with a 2.1% gain. Markets were pleasantly surprised with President Trump’s announcement that ordered a study of reciprocal tariffs rather than an immediate implementation.

Fourth-Quarter Earnings Results

According to FactSet data, multiple sectors drove the improvement in the earnings growth rate for the week.

The financial sector is expected to show the most rapid year-over-year growth rate in the S&P 500, followed by communications services and consumer discretionary. The energy sector is at the bottom, with a forecasted almost twenty-eight percent decline in year-over-year earnings.

Sales growth is closely tied to nominal GDP growth, which combines after-inflation economic growth (real GDP) with inflation. Expected sales growth was unchanged for the week at 5.2% but exceeding expectations at the start of earnings season, with the tailwind from 5% year-over-year nominal GDP growth.

Due primarily to the robust earnings growth for financials, communication services, and consumer discretionary, the blended earnings performance has significantly outperformed expectations at the end of the quarter. Combining actual results with consensus estimates for companies yet to report, the blended earnings growth rate for the quarter is at +16.9% year-over-year, above the expectation of +11.9% at the end of the quarter.

Inflation Nation

Consumer inflation (CPI) came in hot for January, rising to a 3% year-over-year rate. Used cars, airfares, and auto insurance premiums were a large part of the story behind the numbers. Inflation has recently accelerated, with the 3-month annualized rate at 4.9%. Help from some of the volatile components and housing inflation should help it ease somewhat from here.

Despite an ugly month-over-month gain for services inflation, excluding housing, the year-over-year rate declined to 4%. If services inflation continues to improve, markets and the Federal Reserve will rest easier about inflation fears.

Consumer Spending: The Pause That Refreshes?

While December retail sales were revised higher, January data exhibited evidence of a broad-based spending hangover from the robust spending data at the end of last year. In addition, natural disasters may have weighed on spending. As long as U.S. employment continues to rise, consumer spending should snap back.

Sluggish consumer spending caused the Atlanta Federal Reserve to cut its estimate of first-quarter GDP growth to 2.3%. This is nowhere near recessionary levels, but it is down from the robust growth estimate of 2.9% before the retail sales release.

On a more positive note, the easing in economic growth estimates helped bring 10-year U.S. Treasury note yields down from higher levels following the hotter-than-expected consumer inflation reading.

What To Watch This Week

Without as much meaningful economic data this week and most of it impacted by natural disasters, the Federal Reserve meeting minutes on Wednesday could provide some clues to the timing of the next rate cut. The Fed is expected to be on the sidelines until at least mid-year when it might resume short-term interest rate cuts.

Earnings season continues during the holiday-shortened week, but the pace of releases has begun to slow. Given President Trump’s feverish pace of policy announcements, markets will continue to be on guard, although market participants seem to be adapting to the new administration as is typical. The highlight of the week should be Berkshire Hathaway’s earnings and Warren Buffett’s highly anticipated annual letter on Saturday. This follows the release of the details of Berkshire Hathaway’s publicly traded stock portfolio last Friday. Buffett seems to have continued to reduce Berkshire’s allocation to stocks, but he added one new company to its stable of holdings.