A Challenging Market Landscape Despite Strong Q4 Earnings

Based on the data for the fourth quarter of 2025, the S&P 500 should hold the line despite a number of bumps in the economic road. Fourth quarter GDP rose to an annualized 1.4%. Economists had expected 2.8%. The government shutdown is being blamed for the miss. The S&P has found good support each time it tests 6,800.

Consumer spending increased at a 2.4% pace. The core Personal Consumption Expenditures index (PCE), the Federal Reserve’s preferred gauge, rose 3.0% year over year in December, slightly above expectations. On a monthly basis, it climbed 0.4%, and a bit above forecast. This latest read on inflation will keep the Fed on hold.

Higher oil prices, due to the uncertainly with the Iranian situation, will likely keep the inflation data sticky as President Trump is giving the Iranian regime a couple of weeks to respond to U.S. demands over its nuclear program. Talk of a limited strike is keeping a firm bid under crude, and tensions are high in the region.

Source: www.tradingeconomics.com

The decision by the Supreme Court to overturn President Trump’s tariffs was seen as a net positive by the stock market. Many Wall Street analysts had already anticipated the ruling after lower courts struck down the use of the International Emergency Economic Powers Act (IEEPA) in 2025.

Within hours of the ruling, the administration announced plans to use other statutes, such as Section 122 (balance of payments) and Section 232 (national security), to reimpose a 10% global tariff. Retailers, logistics and technology stocks led the market to close firmly higher on Friday.

In light of these developments, reflecting on the quarterly reporting season has been characterized by accelerating revenue and solid profit growth, marking for one of the strongest fundamental performances in several years. However, coming into earnings season, the bar was set extremely high, and hence, the somewhat muted response by the market averages where AI disruption is still the center of conversation.

As of last week, with roughly three out of four S&P 500 companies having reported, the blended year-over-year earnings growth rate is 13.2%. This marks the fifth consecutive quarter of double-digit-percentage growth. Revenue is up 9.0% year over year, marking the highest growth rate since 2022.

Regardless of the concerns about inflation, Iran, tariffs, the K-shaped economy, the weak dollar, Fed policy and the no-hire-no-fire labor market, the overall outlook for Q1 remains historically strong, even if it has cooled slightly from January’s peaks. Analysts are forecasting a 13.1% expansion in earnings for Q1 2026. This is still a robust number, though down slightly from the 15% growth that was being predicted in late December 2025 and reflects a slightly more cautious Wall Street sentiment.

But even as the slope of S&P earnings is curving higher, the index is still elevated, trading at a price-to-earnings (P/E) of 21.5, which is higher than the five-year average of 20.0. But if earnings are expected to accelerate in the second quarter to Wall Street’s 14.9% predicted growth rate, then the higher P/E ratio is warranted.

This would suggest a continuation of the broadening out of the economy and some genuine monetization of the massive capital expenditures on AI that has Investors looking for the big payoff from all the current and foreseeable spending that has weighed heavily on the so-called Magnificent Seven stocks: Alphabet (GOOGL/GOOG),  Amazon (AMZN), Apple (AAPL), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla  (TSLA).

The market has been resilient, finding plenty of subsectors to draw buyers into — namely the metals, materials, data center infrastructure, select health care, travel, electric grid buildout, railroads, energy and aerospace/defense, whereas a lot of shine has come off the quantum computing, crypto, financials, software and communication services sectors. The market has undergone some violent rotation where hard asset real economy stocks are leading.

But the one indicator that is keeping the market able to absorb the volatility is the rally in the 10-year Treasury. The recent move from 4.30% to 4.08% is pretty stunning. Recent auctions have been exceptionally strong. While the stock market has been volatile, the bond market is seeing a massive influx of safe-haven buying. In fact, the 30-year Treasury auction on Feb. 20 saw public demand reach its highest level on record.

The auction coincides with the Supreme Court’s ruling against the Trump tariffs in reaction to perceived lower trade war headwinds, but it also means the government might have to print more debt to cover the possibility of $175 billion in tariff refunds. In any event, the bond market is on firmer footing, which is a catalyst for equities as a whole.

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