Markets Pause to Review Q4 Earnings Outlook

Today the stock markets are closed to honor Dr. Martin Luther King, Jr. This gives us a moment to pause and reflect on the state of the markets early in this new trading year. So far, major stock indexes including the Dow Jones, S&P 500, Nasdaq, and the small-cap Russell 2000 have all risen by at least +2% year-to-date.

Interestingly, this is also the Inauguration Day for President-elect Donald Trump, marking his return to office. He is now the second U.S. president to serve non-consecutive terms, following Grover Cleveland. Since the election on November 5 of last year, stocks have performed well, with the Dow up +4.74%, the S&P 500 increasing by +5.60%, the Nasdaq gaining +8.04%, and the Russell 2000 climbing +3.20%.

The previous election cycle was favorable for the stock market, with the Dow soaring by +44.76%, the S&P 500 increasing by +68.35%, the Nasdaq rocketing up by +95.90%, and the Russell 2000 gaining +9.83%. This remarkable growth has been attributed to advancements in artificial intelligence and the economic boost from mass vaccinations that accelerated recovery from the Covid pandemic. This phase, known as the Great Reopening, led to a strong economic resurgence but also resulted in supply chain issues and rising prices, prompting the Federal Reserve to increase interest rates starting in March 2022.

The market outlook for the next four years remains optimistic, especially with expectations for regulatory rollbacks that could enhance corporate earnings. Notably, the legitimization of cryptocurrencies has invigorated digital currencies like Bitcoin; companies such as Coinbase have seen significant value boosts, rising +59% since Election Day. Additionally, global events like a cease-fire between Israel and Hamas may help create a more stable geopolitical climate as Trump assumes office.

However, there are challenges looming alongside Trump’s proposals. Concerns include aggressive immigration policies, national health initiatives, particularly around vaccines, and potential conflicts with Republican budget hawks over any plans to lower the corporate tax rate again.

This week will kick off the earnings season as several major companies prepare to report their Q4 results. Netflix, Johnson & Johnson, and American Express are among the firms to report. The coming weeks will be crucial as many more companies release their earnings, and initial signs, especially from larger banks like JPMorgan and Citigroup, suggest that the final quarter was relatively strong.

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