AI Enthusiasm, Robust Earnings Drive Stocks to Records: Jan. 22, 2025

Stocks are jumping toward fresh all-time highs as investors cheer new stateside AI investments as well as strong earnings from corporate America. Also helping sentiment is optimism stemming from Davos, Switzerland, where countless company and government leaders are commenting on the need for trade cooperation. Turning to geopolitics, however, Moscow has made it to the list of potential Trump tariffs, with the US Commander in Chief threatening sanctions and levies if Putin doesn’t end the Ukraine war. Meanwhile, today’s equity market enthusiasm is being dominated by technology and communication services, which are the only two sectors gaining, as rising interest rates and a stronger greenback weigh on the other nine segments.

US Leading Indicator Weakens

The US’s leading economic index failed to follow through on its November momentum last month as consumer expectations and new manufacturing orders weighed on the headline figure. The Conference Board’s gauge dropped 0.1% month over month (m/m) in December, missing the median estimate of an unchanged reading and well beneath the 0.4% gain in the previous month. Interest rate spreads, building permits and initial unemployment claims also impeded overall progress. Countering the weakness, on the other hand, were robust stock prices, improving credit conditions, a longer manufacturing work week and firmer business investment.

Consumers Pump Up Quarterly Results

Quarterly earnings reports reflect consumers’ ferocious appetites for entertainment and travel with Netflix (NFLX) and United Airlines (UAL) results and guidance surpassing expectations. Demand for consumer financing and household staples during the fourth quarter was also strong. In other news, regional banks appear to be weathering loftier long-term yields and computer memory provider Seagate has reported strong sales.

The following summaries highlight the results of consumer-oriented companies:

• Netflix has stolen the earnings show by reporting fourth-quarter revenue that jumped 16% year over year (y/y) and by capturing 10 million more new subscribers than analysts anticipated. Co-CEO Ted Sarandos says the company has been successful with retaining customers that it has lured to its platform by streaming live sporting events. Netflix shares jumped more than 14% yesterday.
• United Airlines, for its part, posted revenue and profits that climbed 8% and 64% y/y. It has increased revenues across its offerings, including economy and premium class seating, business travel, and its loyalty program.
• Capital One (COF) Chief Executive Officer Richard Fairbank reported growth in domestic credit card use and a resumption of auto loan volumes increasing. The company’s net interest income, or the difference in the interest it collects from customers and what it pays for capital, also strengthened.
• Procter & Gamble Co. (PG) exceeded both revenue and earnings expectations with increased sales of household staples such as toilet paper and laundry products. Revenue climbed 3% y/y while sales volume by unit grew 1%.

Meanwhile, regional bank stocks, broadly speaking, have declined 8.2% since late November in response to long-term bond yields climbing and creating fear of a possible defaults among commercial real estate (CRE) borrowers. Nevertheless, Great Southern Bank (GSBC) reported a decline in non-performing assets and an improvement in net interest income. Zions Bancorporation (ZION), while disclosing an increase in net loan losses, said non-performing assets relative to the third quarter dipped. Both top- and bottom-line results exceeded forecasts.

In the technology sector, Seagate (STX) beat both earnings and revenue expectations. Chief Executive Officer Dave Mosley attributed the results to growing demand created by artificial intelligence computing.

Canadian Wholesale Prices Climb Again

Canadian wholesale charges rose for the third consecutive month in December, according to this morning’s Producer Price Index. The print reflected increases of 0.2% m/m and 4.1% y/y, compared to the previous month’s 0.6% and 2.2%. The report was much lighter than expectations calling for an unchanged pace of 0.6% m/m. Across the 21 major categories, 13 experienced price increases, two were unchanged and six saw costs decline. The gainers were led by the textile/leather, lumber/wood and miscellaneous product categories with prices increasing 2.1%, 1.3% and 1.2% m/m. Deflationary forces, meanwhile, were present in the energy, pulp/paper, and chemical product segments which saw their stickers fall 0.9%, 0.7% and 0.6%. The tobacco and cement/glass areas arrived flat. 

Australia Leading Index Decelerates

Australia is likely to experience economic growth in the next three to nine months, but it will be weaker than anticipated in November, according to the Westpac–Melbourne Institute Leading Index. The gauge’s December reading weakened from 0.33% to 0.25% m/m.

South Korea Consumer Sentiment Improves

South Korean consumer confidence is beginning to rebound from a two-year low reached last month as political instability worried households, businesses and market participants alike. Moreover, the turbulence coincided with a 2025 economic outlook that is hampered by trade uncertainty following the US’s presidential inauguration day, softer export expectations and weakening domestic consumption. January’s consumer confidence increased for the first time in three months to 91.2 from 88.4 in December.

Tech and Comm Services Push Benchmarks Up

US markets are tilted bearishly despite most equity benchmarks trading north amidst a stronger dollar and weaker Treasurys. The Nasdaq 100, S&P 500 and Dow Jones Industrial indices are higher by 1.4%, 0.7% and 0.1%, but the small-cap Russell 2000 is down 0.7%. Sector breadth is deeply negative with just technology and communication services comprising the gainers; they’re higher by 2.1% and 1.4%. Meanwhile, all other nine segments are losing on the session while utilities, real estate and financials endure the sharpest losses; they’re lower by 1.4%, 1.2% and 0.8%. Treasurys are also down in price, albeit modestly, with the 2- and 10-year maturities changing hands at 4.29% and 4.60%, 2 basis points (bps) heavier on the session for both instruments. Heavier borrowing costs are helping the greenback, however, with the Dollar Index up 13 bps. The US currency is appreciating relative to all of its major counterparts, including the euro, pound sterling, franc, yen and Aussie and Canadian tenders. Commodities are experiencing weak performance overall, with copper, lumber, silver and crude oil lower by 1.1%, 0.5%, 0.3% and 0.1%, but gold is bucking the trend, it’s up 0.5% on a tick higher in geopolitical tensions.

Earnings Growth Is Increasingly Important

Strong earnings can continue to drive equities north despite potential headwinds lurking in the background. Indeed, heavier interest rates, inflation uncertainty, fiscal imbalances and stretched valuations can be conquered by profits growing strongly alongside the economy. But bottom lines can begin to feel the pressure if trade tensions and geopolitical concerns start to meaningfully weaken the already fragile economies of Europe and China, regions that drive a significant share of S&P 500 revenues. Moreover, foreign sales represent almost a third of the S&P 500’s overall top line. Acquiescence, peace and continued international trade collaborations are required for the bull run to gain momentum from here. 

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