This past week ended similar to the way it began. The news regarding DeepSeek drove a sell-off on Monday, and fears of Trump tariffs rattled investors Friday afternoon after a strong start to the session. In between, US stocks settled following decent earnings during the week from S&P 500 companies, sprinkled with central bank decisions from the Federal Reserve and ECB that went right as expected. The net result for the week was negative for US and Asian equity indices, although US Treasuries were slightly improved on the week. European bourses continue to outperform this year, with both the FTSE 100 and the Euro STOXX 600 racking up the best gains in January (both up over 6% for the month). Ah, the merits of portfolio diversification shine through! I am personally surprised that US stocks did as well as they did in January with all of the uncertainty hanging over the unclear fiscal policies of Mr Trump. Nonetheless, at the end of the month, we are left with decent performance in both US stocks and US Treasuries, the latter perhaps more of an uexpected positive surprise.
Both the Federal Reserve (pause, decision here) and the ECB (lowered policy rates 25bps, decision here) served up exactly what was expected this past week.
The FOMC decision reflects a robust and resilient US economy where inflation remains a risk, although 4Q24 GDP came in slightly below expectations and PCE for December (released Friday, here) was bang on expectations at 2.6% YoY headline and 2.8% YoY core.
The ECB decision reflects a moribund Eurozone economy in which inflation is decreasing more quickly than in the US as economic growth flounders, with 4Q2024 GDP coming in at worse-than-expected 0% (here) for the currency bloc and +0.1% for the broader EU.
The Fed fortunately remains almost singularly focused on bringing inflation back to its 2% target, one of its two policy mandates, no matter how much President Trump moans about the Fed’s actions. In any event for those with limited understanding of economics, yields at the intermediate and long end of the US Treasury curve reflect a combination of investors’ expectations regarding future inflation, US economic growth expectations, and fiscal policy. This confluence of determinants was largely contained this week as the Fed did its job, although the future path of fiscal policy (including the daily threat of tariffs and a tighter US labour market due to deportations) remains far from clear. In Europe, the ECB has its hands full as the economy stagnates, a very different picture than in the US. The ECB will almost certainly be focused in its upcoming policy meetings on reinvigorating economic growth in the common currency zone, while the Fed will remain focused on getting inflation back to its 2%/annum target.
The direction of travel of central banks and their respective economies more broadly were reflected not surprisingly in exchange rates this week, with Sterling and the Euro weakening against the US Dollar. The strong Dollar could ultimately prove to be a headwind to US stocks, and conversely, the weaker Pound and Euro are clearly helping sentiment around European stocks. This week, we will get a monetary policy decision from the Bank of England which is expected to reduce the Bank Rate by 25bps.
As far as earnings, 102 S&P 500 companies reported earnings this past week, but none more in focus than four of the Mag 7 tech giants. Having said that, the one other notable company reporting earnings last week – given the DeepSeek news on Monday – was ASML (semiconductor lithography machines), which delivered much better-than-expected results on Wednesday morning to the relief of investors in the computer chip value chain.
As far as the Mag 7 tech giants, MSFT, META and AAPL all delivered better-than-expected top- and bottom-line results, with the specifics of various business lines and the outlook on the analyst call largely determining the direction of share movement. MSFT clobbered expectations, but growth of Azure (cloud business) disappointed investors as it seems growth in its cloud business is capacity constrained. META also delivered excellent results, and Mr Zuckerberg was firing on all cylinders on the analyst call, suggesting that META will capitalise on AI to fuel its growth. AAPL just beat top- and bottom-line expectations, perhaps notable given that sales of iPhone 16 disappointed (lower than expected) and sales in China are decreasing quickly. Somehow, CEO Tim Cook put together a narrative that, in spite of these setbacks, seemed to encourage investors. TSLA was the only one of the four reporting Mag 7 companies that missed its numbers, but Mr Musk pinned the company’s future growth prospects on the rollout of its Robotaxi, and the manufacture and sale of lower cost vehicles. Funny enough, TSLA diehards keep biting into this narrative hook, line and sinker, sending the already over-priced shares even higher. (For FT subscribers that follow TSLA, this is a good read.) What makes investing interesting is momentum stocks like TSLA that become completely untethered from reality, although I must admit that AAPL’s run is also rather perplexing given the challenges it faces ahead.
This table below summarises Mag 7 stock performance last week and YtD, noting that two more of the esteemed group (GOOG and AMZN) report earnings this coming week.
The Lunar New Year started on Wednesday, and this is the year of the snake. As a result, financial markets in China closed on Tuesday (Jan 28th), and will not reopen until this coming Weds (Feb 5th). Next week brings the US jobs report and other data, more earnings, and a Bank of England rate decision (expected to lower policy rate 25bps).
WHAT’S AHEAD
Economic focus: We will get ISM / PMI manufacturing and services data for the US and other countries this week, as well as the first read of January CPI for the Eurozone, and jobs data for the US (JOLTS report Tuesday and January employment report on Friday).
Earnings: It’s another big week for 4Q24 earnings from S&P 500 companies, with 131 companies expected to report earnings including Mag 7 companies GOOG (Tues after close) and AMZN (Thurs after close), along with many others like AMD, PYPL, PEP, UBER, DIS, NVO, QCOM, F, ARM, LLY, PRU and MET. A very good source for tracking earnings is earningswhispers.com.
Upcoming central bank meetings:
Bank of England: Feb 6 (expect to lower Bank Rate 25bps)
ECB: Mar 5-6
Bank of Japan: Mar 18-19
FOMC: Mar 18-19, including revised Summary of Economic Projections
MARKET TABLES
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