Stocks fell sharply on Friday as concerns over tariffs and inflation weighed on investor sentiment. The Dow Jones Industrial Average (DJIA) dropped 444 points, or 0.99%, to 44,303, while the S&P 500 slid 0.95% to 6,026, and the Nasdaq lost 1.36% to 19,523. All three major indexes ended the week in negative territory. Markets turned lower after President Trump announced plans for reciprocal tariffs, potentially raising trade barriers across the board. Earlier in the session, inflation fears had already unsettled investors, with Treasury yields spiking above 4.5% following economic data. The University of Michigan’s consumer sentiment index fell to 67.8, missing expectations, while one-year inflation expectations surged to 4.3%, the highest since late 2023. A stronger-than-expected jobs report added to inflation concerns, showing a drop in unemployment to 4% and higher wage growth. Stocks had been volatile all week, initially falling on Monday after Trump announced 10% tariffs on China. The S&P 500 then rebounded for three days as he paused 25% levies on Canada and Mexico, before selling off again on Friday.
The week ahead: Inflation data, tariffs, retail sales
This week, market attention turns to US inflation with the release of CPI data on Wednesday and a speech from Fed Chair Powell. Core inflation is expected to rise 0.3% in January, up from December’s 0.2% increase, just ahead of Powell’s testimony. The Fed recently kept rates steady, citing strong economic growth, a resilient labor market, and persistent inflation.
Investors will also watch manufacturing output and retail sales data for signs of continued momentum from late last year and whether post-election optimism has bolstered spending and production. Furthermore, markets face another round of tariffs this week as trade tensions escalate. President Trump plans to impose 25% tariffs on steel and aluminum imports starting Monday, while China will retaliate with tariffs on $14 billion of US goods in response to the US’s 10% flat tariff on Chinese imports. Although the trade value is relatively small, the move underscores the lack of a resolution between the two countries, effectively marking the start of a new trade war between the world’s largest economies.
SMCI, Cisco to report earnings
S&P 500 companies posted solid results in the fourth quarter of 2024, with earnings growth exceeding expectations. According to Goldman Sachs, aggregate earnings per share (EPS) rose 12% year-over-year, outpacing the 8% growth forecast at the start of earnings season. The median company saw a more moderate 7% increase in earnings. However, the Wall Street bank’s strategists see the ongoing tariff war as a “key downside risk” to their 2025 EPS forecasts. “Heightened policy uncertainty represents downside risk to valuation because it raises the equity risk premium and implies downward pressure on fair value.” Nonetheless, the Q4 earnings season continues at full steam, with investors bracing for another eventful week.
Wall Street will scrutinize several financial prints from high-profile companies in the coming days, including Coca-Cola (KO), AI server maker Super Micro Computer (SMCI), Cisco Systems (CSCO), and Palo Alto Networks (PANW), among others.
What analysts are saying about US stocks
JPMorgan: “Where we do think US exceptionalism is fading is in Tech space, we are Neutral on the sector and do not see it leading anymore. The Mag-7 expectations are very high, and the proposition of first mover advantage with significant levels of cash to be able to drive needed investments is challenged. We reiterate last summer’s Growth style downgrade from Overweight to Neutral, after 3 years of bullishness. We also reiterate the switch out of Semis into Software that we advised then. SPW should hold up better vs SPX this year.”
Evercore ISI: “Trade developments on 2/1 and 2/7 reinforcing Trade War precedent, we can expect any market resilience or subsequent strengthening – the “High Ground” – to set the table for Trade War II escalation, more tariffs to come.” “Use the current volatility in the “AI Theme” to add to “AI Enablers, Adopters, and Adapters”, core to a portfolio built for 6,800 at Year End 2025.”
Goldman Sachs: “Despite near-term uncertainty, we expect a healthy fundamental outlook will ultimately drive the S&P 500 7% higher to our year-end price target of 6500. The results from 4Q 2024 reporting season broadly affirmed our thematic views for 2025: earnings growth and performance gap between the Magnificent 7 and S&P 493 will narrow, corporate investments will support continued US exceptionalism, and the AI trade will progress from Phase 2 (infrastructure) to Phase 3 (enabled-revenues).”
RBC Capital Markets: “In our previous Pulse, we highlighted how the shift we’ve seen in stock market performance leadership this year, with Value beating Growth and Small Cap stabilizing relative to Large Cap, has seemed justified from an EPS perspective to some extent.” “For now, these stats, along with better earnings growth forecasts in the Russell 2000 than the S&P 500, support the idea of stock market leadership broadening out. The only caveat we would make is that despite these shifts, we do continue to see stronger EPS growth forecasts in percentage terms for the Mag 7 than the rest of the S&P 500 which reminds us that the mega-cap Growth trade still has some earnings-related tailwinds in place.”