Fears Over Tariffs And AI Spending Overwhelm Better Earnings – Forbes

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With almost two-thirds of the fourth-quarter earnings season complete, the pace slows slightly with 77 S&P 500 companies scheduled to report. 77% of S&P 500 firms reported better-than-expected earnings for the quarter. Two of the Magnificent 7 reported earnings last week, with only NVIDIA (NVDA) remaining on February 26. The Magnificent 7 consists of Microsoft (MSFT), Meta Platforms (META), Amazon.com (AMZN), Apple (AAPL), NVIDIA (NVDA), Alphabet (GOOGL), and Tesla (TSLA).

Despite robust earnings growth and a noisy but solid jobs report, concerns about President Trump’s threatened additional tariffs and some worries about artificial intelligence (AI) spending caused some market consternation. The S&P 500 fell 0.2% for the week, but the Magnificent 7 lost 2.8%.

Fourth-Quarter Earnings Results

According to FactSet data, industrials, consumer discretionary, and healthcare contributed most significantly to last week’s earnings growth improvement, while the industrials sector was the largest detractor. Uber Technologies (UBER) was the most significant contributor to industrials, with Amazon.com (AMZN) being the most critical contributor to the consumer discretionary sector. Within healthcare, earnings beats by Pfizer (PFE) and Bristol Myers Squibb (BMY) increased the earnings growth rate.

The financial sector is expected to show the most rapid year-over-year growth rate in the S&P 500, followed by communications services and consumer discretionary. The energy sector is at the bottom, with a forecasted almost twenty-eight percent decline in year-over-year earnings.

Sales growth is closely tied to nominal GDP growth, which combines after-inflation economic growth (real GDP) with inflation. At this point in the earnings season, sales growth at 5.2% exceeds expectations, with the tailwind from 5% year-over-year nominal GDP growth.

Due primarily to the robust earnings growth for financials, communication services, and consumer discretionary, the blended earnings performance has significantly outperformed expectations at the end of the quarter. Combining actual results with consensus estimates for companies yet to report, the blended earnings growth rate for the quarter is at +16.4% year-over-year, above the expectation of +11.9% at the end of the quarter.

Magnificent 7 Earnings

Because these companies are a critical driver of earnings growth and a significant percentage of the S&P 500’s market capitalization, the Magnificent 7 are the group to watch this earnings season. Alphabet (GOOGL) and Amazon.com (AMZN) reported last week. While earnings growth was robust for both, it was below very high expectations, and the stocks were sent lower for the week. Separately, investors are questioning whether both companies’ increased AI infrastructure spending will yield a good return on investment.

Looking at Alphabet specifically, their cloud business revenue, including AI infrastructure demand, grew by 30% year-over-year, but that slowed from the 35% growth in the previous quarter. Notably, the company said capacity constraints, not demand, were the issue. The company expects to spend about $75 billion in 2025 on additional AI infrastructure, an increase of 43% over 2024. Aside from focusing on AI, Alphabet’s core businesses, search and YouTube, performed well in the quarter.

NVIDIA (NVDA) is the final group member to report earnings, scheduled for February 26. The introduction of DeepSeek led to worries that demand for their AI chips might falter, so the stock had been down over 20% from its peak until last week’s 8% rally. Alphabet and Amazon announced significant increases in capital spending to meet AI capacity demands, which helped reduce worries that a decline in demand for NVIDIA’s chipsets could be imminent.

Notable companies reporting this week are McDonald’s (MCD), Coca-Cola (KO), Humana (HUM), Kraft Heinz (KHC), Applied Materials (AMAT), and Airbnb (ABNB).

Jobs, Jobs, Jobs

It was a noisy monthly jobs report on Friday. Nonfarm payrolls grew by 143,000 in January, which was below consensus. More recent months were revised higher but offset by downward revisions to farther out months. Both household employment measures are distorted by a much higher than typical adjustment for immigration-related adjustments. These adjustments also helped send the unemployment rate down to 4%.

The workweek fell to a 5-year low of 34.1 hours, and hourly earnings rose more than expected. Though the government said that the numbers showed no impact from the L.A. fires and weather conditions, it seems likely that there was an impact, so it’s best to take this month’s job data with a grain of salt.

Looking at other labor market data for some clarity, initial claims for unemployment benefits remain low, so there is no sign of a collapse in the job market.

Given the mixed and noisy monthly jobs report, markets and the Federal Reserve (Fed) will wait for more straightforward data to make any decisions about the economy. The Fed is expected to be on the sidelines until mid-year when it might resume short-term interest rate cuts.

What To Watch This Week

Regarding the U.S. economy, the crucial releases will be Wednesday’s consumer inflation (CPI) and Friday’s retail sales numbers. CPI is expected to hold steady at an above-target 2.9% rate, but the details will be more critical with housing costs and services inflation closely watched. Retail sales are expected to slow from December’s rapid pace, but the U.S. consumer is the lifeblood of the economy.

Earnings season slows, but plenty of important companies are reporting this week. Fundamental data could take a backseat to politics. President Trump announced he would roll out reciprocal tariffs this week to match the levies other countries put on U.S. imports. Markets would probably see these as positive relative to the original thought of a 10-20% global tariff, but it would almost certainly add the European Union to the targeted regions. The duration of the higher tariffs, retaliatory action by impacted countries, the strength of the U.S. dollar, and the ability to switch to domestically produced or imports from non-impacted countries will impact any price increases or demand shocks caused by the tariffs, so the ultimate result is impossible to know. In any case, markets dislike uncertainty, so tariff news should add to volatility.