Beyond the Fed: Earnings, tariff risks, and Europe's crossroads

Stocks broke free of their recent losing streak last week. The clear message: it’s not just the Fed that matters.

This earnings season has been one of the strongest in years, tariff discussions are intensifying, and Europe stands at a crossroads.

The S&P 500 climbed +1.5% in touching distance of record highs and the tech-heavy NASDAQ 100 gained +2.9%. Meanwhile, the EURO STOXX 50 outpaced its U.S. counterparts rising +3.2% and setting the stage for its best weekly finish in a month. Gold also glittered again, reaching new record highs.

Beyond the geopolitical chess game, the biggest macro news came from data signaling an inflation pickup in the U.S. That initially caused a temporary spike in yields, but by week's end, both 2-year and 10-year Treasury yields had declined to 4.25% and 4.48%, respectively.

The key takeaway: The Fed will probably be on hold through the first half of this year.

So with the Fed stepping out of the picture, what will drive markets from here?

What do the prints tell us?

Both U.S. consumer and producer prices increased more than markets expected. The headline CPI measure, which includes food and energy, increased by 0.5% month-over-month, while the core CPI, excluding those volatile components, rose by 0.4%. Year-over-year, these figures reached 3.0% and 3.3%, respectively. Producer prices, reflecting input costs, also exceeded expectations.

That data suggests that inflation is not making the same progress as it was six months ago. Importantly, we can gauge U.S. core PCE, the Fed’s favored inflation measure, with the data we have in hand. Since much of the price increases were in items outside those that feed into PCE, both reports suggest a 0.3% increase in core PCE prices.

While this is cooler than the 0.4% rise in CPI, it still probably means the Fed will keep rates steady for the next few meetings. The labor market is still solid and inflation progress is slowing. The Fed still views its current policy rate as restrictive (and so do we), which suggests policy rates are likely to move lower in the longer run. It will just be at a more gradual pace.

Investors have become accustomed to the Fed being a driving force in market moves. Over the last two years, the Fed’s decisions have matched market pricing leading up to each meeting. Now, the market anticipates the Fed to stay on hold until October, meaning the Fed is likely out of play for the next few months.

So what will investors focus on?

Corporate earnings

This earnings season is well underway, with ~75% of S&P 500 companies having reported fourth-quarter figures. Reports indicate a strong earnings season. S&P 500 earnings growth looks like it will come in over 16% year-over-year in the fourth quarter, well above the roughly 11% consensus at the start of the season. If this rate holds, it will be the highest reported growth since Q4 2021 and the sixth consecutive quarter of year-over-year earnings growth.

One of our preferred sectors, financials, is leading the way with the highest year-over-year earnings growth rate of all 11 sectors: ~52%. We believe M&A and capital markets activity will continue to thaw, acting as a tailwind for the sector.

While there is broad corporate enthusiasm for deregulation and a more business-friendly administration, tariff uncertainty is acting as a headwind.

According to FactSet’s natural language processing tool, roughly 50% of those reporting have mentioned tariffs during earnings calls. As more companies report, we are likely to breach the 2018 trade war highs in the number of companies focused on tariffs.

Tariff risks

The week closed with President Trump signing an action for his staff to develop a plan to impose “reciprocal” tariffs on U.S. trade partners.

Before then, the White House had already imposed 10% tariffs on Chinese goods and announced a 25% tax on all U.S. steel and aluminum imports, set to start next month. The latest reciprocal action proposes new levies on a country-by-country basis to rebalance trade relations. Fresh import taxes would be customized for each country, meant to offset not just their levies on U.S. goods, but also non-tariff barriers such as subsidies, regulations, value-added taxes, exchange rates and other factors that limit U.S. trade. The reciprocal tariffs are expected to be imposed as soon as April.

What are reciprocal tariffs? In their simplest form, they levy the same tariff rate on a country that they levy on you. Doing this across 10,000 tariff lines only raises the U.S. weighted average tariff rate by 2%, but the impact varies greatly by country.

Generally, emerging market countries with smaller trading relationships charge high tariffs on U.S. goods. Canada and Mexico have 0% tariff rates with the United States, while China and the European Union have a 2% and 1% rate difference, respectively. Canada, Mexico, China and the EU make up more than 60% of U.S. imports.

However, adding non-tariff barriers dramatically expands the definition of what might be “reciprocal.” For instance, these numbers could rise dramatically if the administration follows through with including value-added taxes and other non-tariff barriers of trade.

For what it’s worth, equity markets seem to be relieved by the latest tariff news. The S&P 500 rallied into the end of the week, nearing new all-time highs. That optimism likely stems from the proposal for reciprocal tariffs being less onerous than campaign promises of flat universal tariffs. The market may also perceive these moves as a potential catalyst for initiating negotiations with other countries, given the stringent initial stance, including VAT taxes, and the extended timeline, with recommendations not expected before April. Indeed, the European equity market, which is more exposed to a trade war than the S&P 500, rose over 3% last week.

The strong European equity start

So far this year, European equities have gained +12.5% (Euro Stoxx 50), marking the best year-to-date performance since 1997. Europe, as an exporting economy, would likely face headwinds from tariffs, so why have European companies outperformed the United States so far? We attribute it to three factors:

1. Earnings expectations. Since summer 2024, earnings estimates for the Stoxx 50 have declined over 6% due to a sluggish economic backdrop and consumer slowdown (domestically and in China). But, those fears seemed to trough in late January, and since then, earnings expectations have increased nearly 1%. So far, the Q4 earnings season in Europe has had a strong start, with notable beats in technology, financials and luxury retailers.

2. The valuation gap. Over the last 10 years, European equities have traded at around a 23% average discount relative to the United States. That discount started the year at a much deeper 36%. Since, investors have been buyers of that valuation gap, with it narrowing it by five percentage points to 31% year-to-date.

3. Ceasefire talks. A potential ceasefire between Russia and Ukraine seems more likely. Last week, President Trump and Russian President Putin reportedly agreed to start negotiating an end to the war in Ukraine. This morning, following the weekend’s Munich Security Conference, headlines indicate that the EU plans to boost defense spending, with estimates suggesting an additional $3.1 trillion over 10 years (according to Bloomberg Economics). Official plans are said to be expected sometime after the German election this weekend.

While much remains uncertain and the situation is highly fluid, European markets seem to be finding some reassurance in the possibility of an end to the three-year conflict.

Market uncertainty has evolved

The Fed’s near-term path seems more certain, and corporate earnings reports continue to impress. Tariffs and geopolitical conflict still pose risks, but the developments from the last week were positive on the margin. We believe multi-asset portfolios should post solid, if unspectacular, performance in 2025.

Investors should focus on sticking to their plans, and should consider building resilient portfolios by adding diversified sources of income and sources of less correlated returns. Your J.P. Morgan team is here to help.​