Fourth quarter earnings season is off to a strong start. Unfortunately, that may not matter much for the stock market.
Many equity strategists anticipate a solid earnings season for companies in the S&P 500 (^GSPC) to take a back seat in the coming weeks as investors dissect President Donald Trump’s return to the Oval Office and his first slew of executive orders.
“Right now, earnings are almost the undercurrent of the stock market, and policy is taking center stage,” Ritholtz Wealth Management chief markets strategist Callie Cox told Yahoo Finance.
Cox pointed to Tuesday’s market action as a prime example of Trump’s policies serving as the key market driver at the moment. In the first full day of trading under the new Trump presidency, the US dollar index (DX=F, DX-Y.NYB) saw its worst one-day drop in a year, falling more than 1% after Trump didn’t take a major tariff action on his first day in office.
Subsequently, stocks rallied. Industrials (XLI) and Materials (XLB), which are considered areas of the market that would benefit from a weaker greenback, were among the top-performing sectors and jumped on the dollar weakness.
The Trump trade boosted tech stocks in midday trading too. A report that Trump would announce a $500 billion investment in private-sector artificial intelligence infrastructure sent Oracle (ORCL) shares more than 6% higher.
The sum of the market action shows that, for now, investors are squarely focused on whether Trump will or will not keep his campaign promises.
Under the surface, the fundamental story for stocks has been humming along. Thus far, 43 companies in the S&P 500 have reported, led by many large banks, and results have been better than expected. FactSet data shows the S&P 500 is now pacing for 12.5% year-over-year earnings growth this quarter compared to the 11.5% expected last week. It would mark the best quarter for S&P 500 earnings growth in more than three years.
Stocks have been rewarded for beats more than they normally are too, according to data from Bank of America Securities equity strategy team. Companies that beat analysts’ estimates on both sales and earnings per share have seen their stocks outperform the S&P 500 by 3.34% the following trading day, well above the historical average of 1.5%.
But Citi US equity strategist Scott Chronert noted that the positive earnings vibe might not be what lifts markets in the coming weeks.
“Short term, markets will have to contend with building fiscal, trade, and monetary policy uncertainty, even if [earnings] reports are solid,” Chronert wrote in a note to clients on Friday.
Chronert added in a separate research note that investors should expect “noise” in company outlooks released this quarter, as more than 90% of the S&P 500 are expected to report earnings following Trump’s inauguration.
“We do anticipate a conservative bias to guidance as C-suites weigh fiscal, trade, and monetary policy uncertainty into their outlooks for the year ahead,” Chronert said.
This discussion brings investors to what strategists argue is the key takeaway from the current focus on Trump’s policies. It’s all about how much the policies will ultimately impact the US economy and corporate profits over the next several years. And even a good outlook today could change tomorrow if Trump moves the goalpost more than investors thought.
“When there’s a lot of noise, you really have to focus on what the economy and earnings are doing, and they’re in a stable place right now,” Cox said. “It’s just hard to say where they’re going next because of that policy fog.”
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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