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With the Fed unlikely to cut interest rates as quickly as hoped, corporate earnings growth becomes even more critical

The postelection stock rally has sputtered. Investors are looking to the coming earnings season to revive it.

The Dow Jones Industrial Average has given up all of its gains since the presidential election, down 0.7% from Nov. 5. The Russell 2000 index of smaller stocks, thought to be one of the biggest potential beneficiaries of a second Donald Trump presidency, has fallen 10% from its recent high in late November.

A spate of hotter-than-expected economic data, including Friday’s blockbuster jobs report, has spurred growing doubts about whether the Federal Reserve will cut interest rates this year. Government-bond yields have soared in response, putting pressure on stocks.

The central bank began bringing down interest rates from a two-decade high last fall but has signaled a more cautious approach going forward. Rate cuts tend to be a tailwind for stock prices because they stimulate economic growth and reduce the appeal of bonds.

Stocks won’t be able to maintain their torrid rise of the past two years and are likely to face greater pressure ahead if yields keep rising, analysts warn.

The Dow industrials and broader S&P 500 are down about 1% in the early days of 2025, while the yield on the benchmark 10-year Treasury note settled Friday at 4.772%, its highest mark since November 2023.

With the Fed unlikely to cut rates as quickly as investors hoped, analysts say corporate earnings growth—historically one of the biggest drivers of stock gains—becomes even more critical to keeping the market afloat.

“This fourth-quarter earnings season is probably one of the most consequential earnings seasons that we’re going to see in a long time,” said Larry Adam, chief investment officer at Raymond James.

Investors will parse results from big banks including JPMorgan Chase, Wells Fargo and Citigroup in the coming days, along with those of BlackRock, the world’s largest asset manager. Fresh consumer inflation numbers are on tap Wednesday.

Analysts expect companies in the S&P 500 to report a roughly 12% jump in profits from the prior year, according to FactSet. That would mark the biggest year-over-year gain since the fourth quarter of 2021, but is down from the 14.5% growth analysts had expected in late September.

Just as important for investors, the coming earnings season, the first since Trump’s electoral win, puts corporate leaders in the hot seat to explain how they plan to navigate the president-elect’s populist agenda.

Some worry that Trump’s proposed tariffs could raise prices for U.S. companies that import overseas products and pass those costs to customers. There are also concerns that Trump’s trade policies and plans for mass deportations could reignite inflation if implemented, and in turn further keep interest-rate cuts at bay.

Strong consumer spending helped keep the economy chugging along in 2024. But consumers, particularly lower-income Americans, began reeling in their spending. Holiday shopping data revealed that wealthier consumers splurged on gifts while lower-income shoppers struggled to pay for necessities such as groceries and child care.

Early quarterly results suggest that consumers are still tightening their purse strings. Nike last month reported a drop in quarterly sales from the prior year. FedEx lowered its earnings and sales guidance for the fiscal year.

Conagra Brands, which produces Swiss Miss hot-chocolate mix and Pam cooking spray, reported a decline in sales and warned that sticky inflation and a strong U.S. dollar could weigh on its business this year.

“Economic pressures continue to shape consumer purchasing decisions,” Conagra Chief Executive Sean Connolly said on last month’s earnings call.

Analysts still expect earnings growth to leap in the year ahead. They are projecting a 15% jump in corporate profits from 2024. Some strategists say that blockbuster growth could be hard to achieve, given the political and economic wild cards that investors could face in the coming months.

Stocks are also looking increasingly pricey, putting more pressure on companies to report financial results that justify their towering valuations. The S&P 500 was recently trading at about 22 times its projected earnings over the next 12 months, above its 10-year average of 18.5 times, according to FactSet.

Some strategists say earnings growth will need to broaden beyond big tech titans to support the next leg of the stock rally.

Their staggering size has made their ability to deliver profits and positive guidance hugely influential over the market’s direction. The Magnificent Seven—Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, Nvidia and Tesla—are expected to post a 22% jump in fourth-quarter earnings. That compares with a 8.7% rise from the other 493 companies in the S&P 500, according to FactSet data as of Thursday.

Analysts expect financial companies to see the highest year-over-year earnings growth among the S&P 500 sectors, at about 40%, followed by a 21% jump from communication-services companies, according to FactSet. The energy sector is expected to report the biggest profit decline, at 26%.

“The healthy next step for this market is for everything, the earnings growth but also valuation, to spread,” said Keith Buchanan, senior portfolio manager at Globalt Investments.

Fears of nuclear conflict are growing again as arsenals expand, alliances shift and treaties dissolve

At the end of the Cold War, global powers reached the consensus that the world would be better off with fewer nuclear weapons.

That era is now over.

Treaties are collapsing, some nuclear powers are strengthening their arsenals, the risk is growing that nuclear weapons will spread more widely and the use of tactical nuclear weapons to gain battlefield advantage is no longer unimaginable.

The path to resurgent fears of nuclear war began in 1945, with the first nuclear test blast at the Trinity test site in New Mexico.

In 1963, during the throes of America’s Cold War rivalry with the Soviet Union, President John F. Kennedy described his fear of a nuclear age without guardrails, in which dozens of nations possess weapons of mass destruction—what he called the “greatest possible danger and hazard.”

For decades, arms-control agreements, technological challenges and fears of mutually assured destruction kept such a doomsday on the distant horizon.

As years passed, U.S. and Russian stockpiles of nuclear warheads grew, then shrank—while China, in recent years, began its ascent.

The global stockpile reached a peak in the mid-1980s, and has since been significantly reduced. In the first Start treaty, signed in 1991, the U.S. and Soviet Union agreed to cap the number of their warheads.

But one of the two critical nuclear-arms-control pacts between Russia and the U.S., the Intermediate-Range Nuclear Forces Treaty, has collapsed. The New Start treaty, which placed even tighter limits on the number of deployed warheads on each side and the missiles and bombers that carry them, expires early next year.

Senior officials in Washington now say the U.S. needs to be prepared to expand its nuclear force to deter growing threats from Russia and China—raising the potential of a new arms race.

China’s growing stockpile of nuclear weapons is expected to triple by 2035, according to some estimates.

The latest estimates indicate that China has about 600 intercontinental ballistic missiles in its arsenal, all of which can reach the U.S. mainland, according to a Pentagon assessment of China’s military released in December. Beijing has rejected past proposals that it meet with the U.S. and Russia to negotiate formal limits on nuclear forces.

The leading nuclear powers have intercontinental nuclear weapons. The U.S., Russia and China are all triad nuclear powers—meaning they can deliver nuclear weapons from land, sea and air, allowing them to launch an attack on any of their potential foes.

The images below cover only currently deployed, land-based weapons. The Earth’s circumference is roughly 24,900 miles.

While the U.S. and Russia whittled down their stockpiles, concerns have risen about the use of tactical nuclear weapons. These are weapons with shorter ranges and smaller yields, which could make a big difference on the battlefield in an otherwise conventional war without sparking a wider nuclear conflict.

Moscow has hinted that it might use nuclear weapons in Ukraine and introduced a doctrine in November that made the grounds for potentially using them broader and more explicit. Western powers feared Russia might decide to use tactical weapons in the conflict if it found itself on the defensive.

Efforts to contain nuclear threats have centered on the 1970 Treaty on the Non-Proliferation of Nuclear Weapons, or NPT, which now has 191 signatories that have pledged never to acquire nuclear weapons or, for those that have them, pursue disarmament.

But three nuclear-weapon states never accepted the NPT, and North Korea officially withdrew from the treaty in 2003. Iran, while a party to the treaty, could be months away from building a nuclear weapon; Saudi Arabia has said it would follow suit if that happens. The NPT gives the United Nations atomic agency only limited powers to prevent that.

President Kennedy’s warning of the perils of a global arms race was an argument for a continued effort to limit arsenals through treaties. While those treaties, especially the NPT, have bound many nations into staying away from nuclear weapons, those commitments could be tested in a world of serious global tensions and the weakening of traditional alliances.

President Biden blocked the sale of U.S. Steel to the Japanese steelmaker earlier this month

The U.S. government has extended until June a deadline for Nippon Steel 5401 -1.30%decrease; red down pointing triangle to drop its planned acquisition of United States Steel.

The U.S. steelmaker said Saturday that a federal interagency panel charged with probing foreign investments for national-security risks had granted an extension to June 18 for the requirement in President Biden’s executive order that the parties permanently abandon the transaction.

“We look forward to completing the transaction, which secures the best future for the American steel industry and all our stakeholders,” U.S. Steel X 4.45%increase; green up pointing triangle said in a statement.

President Biden blocked the sale of U.S. Steel to the Japanese steelmaker earlier this month, fulfilling his pledge to keep the U.S. steelmaker domestically owned.

Biden’s decision came after the Committee on Foreign Investment in the U.S. spent months reviewing the $14.1 billion deal for potential national-security risks.

In an order on Jan. 3, the White House required the companies to abandon the deal within 30 days unless Cfius agrees to extend the timeline.

U.S. Steel and Nippon Steel filed a pair of lawsuits to challenge Biden’s move to block the deal.

In one lawsuit the companies asked the D.C. Circuit Court of Appeals to set aside the decision, claiming that election-year politics subverted a national-security review process. The companies want the appeals court to order a new national-security review of the deal.

A White House spokeswoman has said Biden’s decision was based on national security and trade experts’ determination that the deal would create risks to the U.S.

Hamas Has Another Sinwar. And He’s Rebuilding.

Under Yahya Sinwar’s younger brother, Hamas is recruiting new fighters in Gaza, drawing Israel into a war of attrition

Hamas suffered a severe blow last fall when Israel killed Yahya Sinwar, the group’s leader and strategist behind the Oct. 7 attacks.

But now the U.S.-designated terrorist group has another Sinwar in charge, Yahya’s younger brother Mohammed, and he is working to build the militant group back up.

Israel’s 15-month campaign has reduced Hamas’s Gaza Strip redoubt to rubble, killed thousands of its fighters and much of its leadership, and cut off the border crossings it might use to rearm. The well-trained and well-armed cadres who surged into southern Israel on Oct. 7, 2023, are badly weakened.

But the violence has also created a new generation of willing recruits and littered Gaza with unexploded ordnance that Hamas fighters can refashion into improvised bombs. The militant group is using those tools to continue to inflict pain. The Israeli military in the past week has reported 10 deaths among soldiers in the area of Beit Hanoun in northern Gaza. Hamas also has fired some 20 rockets at Israel in the past two weeks.

The recruitment drive and persistent fighting under Sinwar pose a fresh challenge for Israel. Its military has battered the group in Gaza, but for months has had to return to areas it previously cleared of militants to take them on again in new fighting. That cycle points to the difficulty of ending a war that has exhausted Israel’s troops and continues to imperil hostages still held in Gaza.

“We are in a situation where the pace at which Hamas is rebuilding itself is higher than the pace that the IDF is eradicating them,” said Amir Avivi, a retired Israeli brigadier general, referring to the Israel Defense Forces. “Mohammed Sinwar is managing everything.”

Spokespeople for Hamas declined to comment.

Mohammed Sinwar is at the center of Hamas’s revival effort. When Israeli soldiers killed his brother in October, the movement’s officials, based in the Qatari capital, Doha, decided to form a collective leadership council rather than appoint a new chief.

But Hamas militants in Gaza didn’t go along and now operate autonomously under the younger Sinwar, according to Arab mediators involved in cease-fire talks with Israel.

Mohammed Sinwar is believed to be about 50 and has long been considered close to his older brother, who was more than 10 years his senior. Like Yahya Sinwar, he joined Hamas at an early age and was considered close to the head of the movement’s armed wing, Mohammed Deif.

Unlike his brother, who spent more than two decades in an Israeli prison, Mohammed hasn’t spent a significant amount of time in Israeli jail and is less understood by Israel’s security establishment. He has operated largely behind the scenes, according to Arab officials, earning him the nickname “Shadow.”

“We are working hard to find him,” said a senior Israeli official from the Southern Command, which runs the battle in Gaza.

According to Israeli officials, Mohammed Sinwar was one of the people responsible for the kidnapping of an Israeli soldier in 2006 that eventually led to his brother’s release in a prisoner swap five years later.

With Yahya Sinwar, Deif and Deif’s deputy all dead, Mohammed Sinwar is now Hamas’s most senior commander in Gaza, along with Izz al-Din Haddad, the military head in northern Gaza, according to political analysts who study the militants.

Before the war, Israel believed that Hamas had up to 30,000 fighters arranged into 24 battalions in a structure that loosely resembled a state military. The Israeli military now says it has destroyed that organized structure and has killed about 17,000 fighters, and detained thousands of others.

Hamas, which Israeli and Arab officials say still controls large areas of the Gaza Strip, hasn’t said how many fighters it has lost. The number of new Hamas recruits also remains unclear.

The Israeli military says Hamas has recruited many hundreds of people in the past few months and that recruiting was happening across Gaza, with a focus on the north. Arab officials say they have been told by Israel the number could be in the thousands.

The new fighters, while inexperienced, are launching hit-and-run attacks in small cells of just a few fighters. They are using guns and antitank weapons that require little military training.

Hamas is recruiting the new fighters with promises of more food, aid and medical care for young men and their families, according to Arab officials, who say the militants sometimes steal humanitarian aid or co-opt civilians to work with the militant group.

The U.S. and international aid groups have long pressed Israel to allow more aid into the Gaza Strip, where residents have had to contend with hunger and high prices. Israel has said it admits lots of aid and has pointed to distribution problems by aid groups and looting by forces including Hamas as impediments to getting more of it to Palestinians.

Hamas militants are also targeting funerals and prayer gatherings to find aggrieved young Palestinians inclined to sign up, these officials said.

The recruiting drive is extending a war that was triggered by the Hamas-led attacks on Oct. 7, 2023, which left around 1,200 people dead and about 250 taken hostage. About 400 Israeli soldiers have died fighting in Gaza. More than 46,000 people have been killed in Gaza during the war, according to Palestinian health authorities, who don’t say how many were combatants.

Israeli soldiers have spent months in a new fight with Hamas in northern Gaza. Demonstrating the numbers of militants still operating, the Israeli military earlier this month said it apprehended more than 240 fighters from Hamas and Palestinian Islamic Jihad, another militant group, in a single battle at a hospital in the area.

Videos posted online by Hamas’s armed wing show how it is currently fighting in northern Gaza. In a video from late last year, four fighters creep up on a tank and attach a device that causes the vehicle to explode. Another video shows a Hamas militant moving through the debris of a bombed-out building before launching a rocket-propelled grenade at a tank.

Once a bustling hub of Palestinian life, the Gaza Strip has been reduced to rubble, with most of the prewar population of more than two million squeezed into an encampment of tents and other makeshift housing along the beach.

Months of efforts to reach a cease-fire that would free many of the hostages still being held in Gaza have been fruitless, amid deep-seated disagreements over issues including Israel’s demand that it be able to continue the fight after a pause.

Mohammed Sinwar has proved as stubborn as his older sibling in pushing for a permanent cease-fire that ensures Hamas’s survival, according to Arab officials mediating the talks.

“Hamas is in a very strong position to dictate its terms,” Mohammed Sinwar wrote late last year in one message to mediators that was shared with The Wall Street Journal. He wrote in another message: “If it is not a comprehensive deal that ends the sufferings of all Gazans and justifies their blood and sacrifices, Hamas will continue its fight.”

Israeli Prime Minister Benjamin Netanyahu has said the fighting will continue until Hamas is destroyed.

Israel has blunted Hamas’s ability to smuggle weapons by carving security corridors into the strip and by taking control of the 9-mile-long border between Egypt and Gaza. But the group had a large arms stockpile before the war and continues to be able to fire rockets.

Israel’s difficulty in uprooting Hamas contrasts with its success in killing many of the group’s senior leaders, both in Gaza and abroad, and the beating back of Hezbollah in Lebanon. Israel forced Hezbollah to accede to a cease-fire there that has eased fighting, after the Iran-backed militia came to Hamas’s aid in the war by firing rockets into Israel almost daily.

U.S. Ambassador to Israel Jack Lew said on Jan. 10 that the U.S. has long thought it was a mistake to set the destruction of Hamas as the goal. The U.S. has pushed Israel to come up with a plan for governing the Gaza Strip after the war so that Hamas can be squeezed out.

Many in Israel’s security establishment agree. They want the government to introduce a new administration that could counter Hamas’s control over parts of the strip, with the Palestinian Authority viewed as the only realistic option.

Netanyahu has opposed a role for the Palestinian Authority, which administers parts of the occupied West Bank. Other players, such as Arab states, appear unwilling to take control of Gaza while Hamas remains a military threat. The Israeli prime minister’s office didn’t respond to a request for comment.

“Hamas had a major, major blow, but it’s still there,” said Yoel Guzansky at the Tel Aviv-based Institute for National Security Studies think tank. “They will recruit, rearm.”

Asset managers turn to defensive positioning as equity prices soar

Elevated level of stocks and prospect of higher for longer rates have some firms sending up caution flares

Asset managers overseeing trillions of dollars are cautioning clients to take a defensive position heavy on bonds in the face of rising equity prices and the expectation that the Federal Reserve is increasingly unlikely to cut interest rates much further.

A key Vanguard model released as part of the $10tn asset manager’s 2025 outlook now calls for financial advisers and certain wealthy individual investors to allocate 38 per cent of their portfolios to stocks and the remainder to fixed income. That recommendation is down from 41 per cent for 2024 and 50 per cent for 2023, tantamount to flipping the popular 60/40 portfolio on its head.

“For that investor who is willing to take a little bit of active risk and deviate from their long-term policy portfolio, we think de-risking would make sense,” Todd Schlanger, a senior investment strategist at Vanguard, said in an interview.

Vanguard’s latest forecast was cemented after the November election of president-elect Donald Trump and Republican allies in Congress, which led to an initial stock market bump that has since ebbed. While investors have been bullish about the prospects of Trump’s “Maganomics,” economists have put forward gloomier prognostications fuelled by worries over elevated inflation and interest rates.

Vanguard’s support for greater fixed income exposure follows two years of roaring US equity performance — a bull run that has made stocks look too costly to some. The S&P 500’s price-to earnings ratio, a commonly used valuation metric, has grown from about 19.2 in September 2022 to nearly 30 as of this week.

Invesco’s solutions arm is also advising increased fixed income exposure, as well as focusing equity holdings in defensive sectors such as heathcare, consumer staples and utilities.

Charles Shriver, a portfolio manager at T Rowe Price, said his team remains predisposed to equities but has tilted towards value stocks, eschewing pricey growth companies in favour of “more attractively priced areas”.

“Stocks look extremely expensive on a historical basis,” said Will Smith, a high yield manager at AllianceBernstein. “It’s going to be really hard to have stock returns over the next decade nearly as high as they’ve been over the past decade.”

The approach of preferring bonds over equities was out of favour last year when the S&P 500 wrapped up its second consecutive strong year, Schlanger acknowledged, noting that Vanguard’s “time-varying asset allocation” model has a 10-year horizon in mind.

“You can have these periods of underperformance,” he said. “But we would still view the model as doing what it’s supposed to be doing and trying to manage the risks that are out there, recognising that as US equities have continued to go up in price, the potential for lower returns and the potential for drawdown increases.”

The S&P 500 enjoyed a bounce after Trump’s decisive November victory, propelling it to a record high just under 6,100 on December 6. But markets have been muted since then, and 2024 ended on a down note for equities with no “Santa Claus” rally to be found.

“The election trades are already losing momentum,” said Alessio de Longis, head of investments for Invesco Solutions.

“In a nutshell, our view is that growth is decelerating,” he added. “The evidence that inflation is weakening aggressively is not really there.”