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Weekly Update 02/14/2025: Earnings Season Winds Down as Inflation Pressures Remain Sticky

Insights
  • Carrier beats profit forecasts citing acceleration in data center demand
  • DuPont beats profit and revenue forecasts on strong semiconductor and AI demand
  • Coca Cola beats profit and revenue forecasts amid volume and price increases
  • Zoetis beats profit and revenue forecasts while issuing conservative guidance
  • Ventas beats profit and revenue forecasts on a solid quarter - raises dividend by 6.7%
  • Deere beats profit and revenue forecasts indicating they are seeing signs of a turnaround in the agricultural industry
  • T. Rowe Price raises dividend for the 39th consecutive year

Domestic Economic News

Here is a quick summary of this earnings season so far. As of last Friday, 72% of the S&P 500 companies had reported with the index showing a very strong 13.3% year-over-year growth so far relative to the expectation for 7.3% growth. The earnings “beat” rate was slightly lower than normal however coming in at 77.6% with 16.2% missing compared to the three year average of 78.4% and 17.3%.Top line revenue growth has been pretty solid as well with 54.2% of companies beating sales estimates and 24.7% missing compared to the post pandemic average of 62.3% and 23.9%. The S&P 500 top line has shown 5.5% growth so far which is 86 basis points (bps) better than the preseason forecast. In terms of operating margins, they are up 77 bps over the prior year but are under performing expectations so far by about 64 bps, which may be a reflection of continued inflation pressures and the strength of the US dollar. Bottom line is – so far so good!

Underlying US inflation last month rose by more than forecast, supporting the Federal Reserve’s cautious approach to lowering interest rates. The so-called core consumer price index — which excludes food and energy costs — increased 0.4% in January after a 0.2% advance in December, Bureau of Labor Statistics figures showed Wednesday. From a year ago, it rose 3.3%. Economists see the core gauge as a better indicator of the underlying inflation trend than the overall CPI that includes often-volatile food and energy costs. The headline measure rose 0.5% from December and 3% from the year before. The BLS said nearly 30% of the advance was due to shelter. The report incorporated new weights for the consumer basket to try to more accurately capture Americans’ spending habits. The annual recalculation also subjects five years’ worth of seasonally adjusted monthly data to revisions.

US wholesale prices rose in January by more than forecast on higher food and energy costs, highlighting only limited progress on inflation ahead of tariffs imposed by the Trump administration. The producer price index for final demand climbed 0.4% from a month earlier following an upwardly revised 0.5% increase in December, according to a Bureau of Labor Statistics report released Thursday. The median forecast in a Bloomberg survey of economists called for a 0.3% gain. Compared with a year ago, the PPI increased 3.5%. Economists pay close attention to the report because several of its components feed into the Federal Reserve’s preferred inflation measure — the personal consumption expenditures price index. Those categories were more favorable in January, registering declines in most health care items and in airfares. Stock futures climbed while Treasury yields and the dollar fell after the report.

A separate report released Thursday by the Labor Department showed initial applications for US unemployment benefits declined last week by 7,000 to 213,000. Continuing claims, a proxy for the number of people receiving benefits, declined to 1.85 million in the week ended Feb. 1. Jobless claims continue to hover near historically low levels as layoff announcements remain scattered with business owners hopeful about the economy’s direction. A recent NFIB survey showed 77% of small-business owners believe this is a good time to expand, up from 4% a few months ago. However, they may be cautious to hire or expand while they wait to see how policy objectives — especially on deregulation and taxes — unfold under the Trump administration.

President Donald Trump ordered his administration to consider imposing reciprocal tariffs on numerous trading partners, raising the prospect of a wider campaign against a global system he complains is tilted against the US. The president on Thursday signed a measure directing the US Trade Representative and Commerce secretary to propose new levies on a country-by-country basis in an effort to rebalance trade relations — a sweeping process that could take weeks or months to complete. Howard Lutnick, Trump’s nominee to lead the Commerce Department, told reporters all studies should be complete by April 1 and that Trump could act immediately afterward. Fresh import taxes would be customized for each country, meant to offset not just their own levies on US goods but also non-tariff barriers the nations impose in the form of unfair subsidies, regulations, value-added taxes, exchange rates and other factors that act to limit US trade, said a White House official, who briefed reporters before the announcement. The US dollar declined and stocks rallied after the announcement as traders were relieved tariffs were not immediately levied on US trading partners.

Interest Rate Insight and the Fed

Federal Reserve Chair Jerome Powell said the central bank doesn’t need to rush to adjust interest rates, again signaling that officials will be patient before lowering borrowing costs further. “With our policy stance now significantly less restrictive than it had been and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance,” Powell told the Senate Banking committee Tuesday. “We know that reducing policy restraint too fast or too much could hinder progress on inflation,” he said. “At the same time, reducing policy restraint too slowly or too little could unduly weaken economic activity and employment.” Following his testimony, Treasury bond yields remained higher on the day while stock prices fluctuated. Traders also largely left unchanged their expectations for rates this year, with a cut not fully priced until September and less than two cuts priced in for all 2025. Powell’s comments largely echoed remarks he gave in January after Fed policymakers left the central bank’s key policy rate unchanged. That decision came after the Federal Open Market Committee lowered interest rates at each of its last three meetings in 2024. Powell and other officials have signaled they are likely to hold rates steady until they see more progress on lowering inflation, and as they await further details on President Donald Trump’s economic-policy plans. The labor market remains sound, which officials have said also allows them to be patient in considering further interest-rate reductions. Powell on Tuesday described the labor market as “broadly in balance” and “not a source of significant inflationary pressures.”

Federal Reserve Bank of Cleveland President Beth Hammack said it’s appropriate to keep interest rates steady for “some time” while policymakers await further downward progress on inflation and analyze the economic effects of new government policies. “We have made good progress, but 2% inflation is not in sight just yet,” Hammack said Tuesday in prepared remarks for an event in Lexington, Kentucky. “As long as the labor market remains healthy, I am looking for broad-based evidence that inflation is sustainably returning to 2% before adjusting policy further.” Hammack outlined two key factors supporting the need for a patient approach to monetary policy. She pointed to lingering upside risks to inflation, including the strength of consumer spending and the potential for last year’s rate cuts to stoke economic activity with a lag. The Cleveland Fed chief also highlighted uncertainty around new government policies, like those pertaining to regulation, taxes, immigration and tariffs. She said it will take “some time” to analyze these and decide on the appropriate monetary policy response. “Taking the case of tariffs as one example, it is appropriate for policy to be patient in assessing their ultimate effects,” Hammack said. “Given the recent history with elevated inflation, the risks to the inflation outlook appear skewed to the upside, and this could delay a return to 2% and further risk embedding elevated inflation into the economy.” She reiterated that policy is only modestly restrictive, adding the Fed “may be at or close to a neutral setting already.” A neutral stance is a level of rates that neither stimulates nor restrains economic activity. Fed officials held interest rates steady when they met last month, following a percentage point of reductions in late 2024. Hammack dissented against her colleagues’ decision in December to lower borrowing costs for a third-straight time, instead preferring to leave rates unchanged until there is further evidence of inflation moving toward the central bank’s 2% goal. Hammack noted in her latest speech that she’ll be watching inflation data closely at the beginning of the year to see if — similar to last year — employers implement outsized price increases.

Impactful International News

French unemployment unexpectedly declined at the end of 2024, showing signs of economic resilience in a country wrestling with political instability and rising debt. The jobless rate fell to 7.3% in the final three months of last year from 7.4% in the previous quarter, according to statistics agency Insee. Economists surveyed by Bloomberg had forecast an increase to 7.5%. The slight improvement in the labor market provides some relief for Prime Minister Francois Bayrou’s minority government as it struggles to cling to power and rein in a gaping budget deficit. The premier survived a crucial no-confidence vote at the National Assembly last week, allowing France to adopt a delayed budget for this year. But his administration remains vulnerable if opposition parties unite on other issues to force his resignation. While the unemployment rate declined, it remains above the 40-year low of 7.1% reached in 2022. France’s biggest companies have warned that political and fiscal uncertainty since President Emmanuel Macron called snap elections in the summer, as well as increases in corporate tax in the budget, are weighing on investment and hiring.

The UK sold a record £13 billion ($16 billion) of 10-year bonds after attracting the highest-ever demand for such securities from investors keen to lock in yields near multi-decade highs. The government received more than £140 billion of orders for the new debt, which was sold via banks in a syndication. The sale smashes a previous record for gilt demand set less than a month ago, and signals investor appetite to capture yields at current levels as the Bank on England continues to lower interest rates. It’s also a sign that traders are looking beyond worries about fiscal probity and excess supply that dogged the UK government and bond market at the start of the year and sent yields surging. “Debt sustainability worries have decreased a bit and the dovish vote split has likely helped sentiment,” said Evelyne Gomez-Liechti, strategist at Mizuho International, referring to the BOE decision last week. Pricing of the sale was set at 5.5 basis points over comparable bonds, down from a range of 5.5 to 6 basis points previously. Debt syndications are typically more expensive than auctions, but they allow governments to raise large sums quickly while diversifying their investor base. UK 10-year yields rose to almost 5% last month, the highest since 2008, after investors balked at the prospect of absorbing huge bond sales announced by the Chancellor of the Exchequer Rachel Reeves in her October budget to fund the government’s spending plans. Yields have since retreated and were two basis points higher at 4.48% at 12:25 p.m. in London in Tuesday trading. The sale this week was larger than forecast by market participants, and that has material implications for gilt issuance for the rest of the financial year, which runs until April. The two remaining scheduled medium-maturity auctions will likely be about £1 billion smaller than their recent averages, according to Megum Muhic, a strategist at RBC. “This all adds to the notion that today’s transaction marks the peak in gilt supply for the quarter,” Muhic said. “The gilt supply schedule is set to be supportive of gilt cross-market outperformance through to the end of March.”

Company Events

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