There were a lot of distractions for Wall Street this week, with the DeepSeek headlines serving as the biggest distraction and driving many stocks lower.
As I wrote about on Tuesday, the Chinese company sent shockwaves throughout Wall Street, igniting sharp pullbacks in AI chip makers and server providers. But the hardest hit stocks were the companies aiding in the buildout of the electrical grid and the construction of data centers.
The ensuing irrational panic ended up overshadowing two other key events.
First, the Federal Reserve was slated to issue its latest policy decision on Wednesday. The other focus was expected to be on earnings season. The fact is we entered the heart of the fourth-quarter earnings season this week, with four of the seven Magnificent Seven companies reporting. (I’ll review them in tomorrow’s Market 360, so stay tuned!)
But all of the sudden, concerns about the U.S. artificial intelligence industry’s future stole the show from discussions of the Fed and quarterly results. (Our experts weighed in on the DeepSeek news in a roundtable discussion, which you can view here.)
All of this to say that the Fed meeting sort of took a back seat to all the action this week. After all, no big changes to key interest rates were expected. And when there is panic in the air, the attention span of the markets tends to be like that of a toddler (short and temperamental).
Now, I want my readers to deal in the world of rationality. And the reality is that there are some key takeaways we can glean from the latest Fed meeting. So, in today’s Market 360, we’ll consider the Fed’s unanimous decision to stand pat and discuss what it plans to watch closely in the upcoming months – including moves from the Trump administration.
Fed Stays the Course on Rates – No Surprises Here
On Wednesday, the Federal Reserve voted to keep its key interest rate range at 4.25%-4.5%. No one was shocked – after all, the CME FedWatch tool showed a 99.5% chance of no change.
If you dig into the Federal Open Market Committee (FOMC) statement, there were a couple of interesting tweaks, though. First, the central bank removed language about inflation having “made progress” toward the Fed’s 2% goal. Now, it simply says “inflation remains somewhat elevated.”
Second, officials revised their characterization of the labor market. Previously, the Fed said unemployment had “eased.” Now, it says the jobless rate has “stabilized at a low level,” and that overall conditions remain “solid.”
Translated from Fedspeak, the Fed wants to remain data-dependent. And right now, the data isn’t there to justify a rate cut, in their view.
In Fed Chair Jerome Powell’s post-meeting press conference, he hinted there was “no hurry” to adjust policy further. He said he believes rates are “significantly less restrictive” than they were before the Fed kicked off last fall’s rate cuts.
I should add that President Trump responded to the Fed news by accusing the Fed and Powell of mishandling the economy, saying they “failed to stop the problem they created with Inflation”.
Either way, it seems clear to me that whether we like it or not, the bar for further cuts is now set higher. Powell & Co. want to see more compelling evidence that inflation is on its way toward their 2% target.
On that note, this morning we learned that the Fed’s favorite inflation indicator, the Personal Consumption Expenditures (PCE) index, showed relatively flat prices in recent months. Core PCE, which excludes food and energy, rose 0.2% in December and was up 2.8% in the past 12 months. Both were in line with expectations.
Now, we’ll gain more clarity on the path of key interest rate cuts in the March FOMC meeting, as the Fed will release its next “dot plot” survey. But it is widely anticipated that the Fed will cut key interest rates at least two more times this year, especially if inflation continues to moderate. Many Fed officials have been vocal about expecting inflation to cool throughout 2025.
More Cuts Are on the Way…
In fact, the CME FedWatch tool suggests traders are already placing bets on at least one – maybe two – quarter-point cuts by June. That could have something to do with the fact that, after a furious run-up, the 10-Year Treasury yield has declined from a peak of nearly 4.8% to about 4.5%, as of this writing.
That’s quite the decline for the bond world, folks. And I expect market rates to decline further as global central banks cut their rates, which should, in turn, spur global bond investors to buy U.S. Treasuries. And as I always like to say, the Fed doesn’t like fighting market rates.
So, the bottom line is rate cuts are on the way. It may be later in the year, but I think it is entirely possible that we could see up to four quarter-point cuts this year.
The Trump 2.0 Factor
The reality is the Fed is being extra cautious because right now because it wants to see which policies the Trump administration will enact, focusing specifically on how tariffs, taxes and immigration could impact the U.S. economy.
Powell even stated during his press conference, “We need to let those policies be articulated before we can even begin to make a plausible assessment of what their implications for the economy will be.”
President Trump, for his part, has been “demanding” that the Fed lower interest rates. But when asked about these comments, Powell demurred, as the Fed generally likes to stay out of the political fray.
Meanwhile, all eyes are on the tariff front today, as President Trump has threatened to implement a 25% tariff on all imports from Mexico and Canada tomorrow, February 1. (Earlier this week there were reports that he had pushed back the tariff deadline to March 1, but the Trump administration denied that this afternoon.) In addition, he’s threatened tariffs against China.
The reason, according to Trump, is he wants action to be taken to stop the flow of undocumented migrants and fentanyl into the U.S.
But you should know that President Trump likes to use tariffs to make allies uncomfortable, so he can negotiate from strength. And although both Canada and Mexico have said they will retaliate against any tariffs, the reality is that it would devastate their economies much more than it would ours.
So, I believe he wants a deal at the end of the day. We’ll know more tomorrow if Trump’s tariffs are imposed on Canada and Mexico.
But this is the backdrop the Fed is operating against right now. I think they will realize, in time, that these tariff threats are simply negotiation tactics. And, what’s more, any tariffs that go into place will likely not be inflationary, since the U.S. dollar is incredibly strong right now.
Keep Your Eye on the Ball
Now, we’ll keep an eye on these developments as needed. But I want to emphasize that you should remain focused on what really matters right now.
I’m talking about earnings, of course.
The fact is earnings are accelerating and expected to be strong every quarter of 2025. FactSet currently projects 11.3%, 11.6%, 15.3% and 16.6% average earnings growth in each of the four quarters of 2025, respectively. And calendar year 2025 earnings are expected to average 14.8%.
What’s more, my Growth Investor stocks should soundly beat the S&P 500 this year. My Buy List is characterized by 509% average annual earnings growth and 23.8% average annual sales growth – and my Growth Investor stocks have benefited from positive analyst revisions over the past three months.
In other words, I anticipate wave-after-wave of positive earnings surprises to dropkick and drive my Growth Investor stocks higher throughout the year!
To further position my Growth Investor Buy List for the stunning earnings season, I decided to add two new buys in today’s Growth Investor February Monthly Issue. One is on the verge of posting another big earnings surprise, as analysts have more than doubled estimates in the past three months. The other is a company that reported fourth-quarter adjusted earnings that were 37% higher – and is expected to greatly benefit from Trump’s “drill, baby, drill” policy.
Go here now to view my latest research and learn how to get the latest issue of Growth Investor.
Sincerely,
Louis Navellier
Editor, Market 360
