Bumper Earnings, Falling Inflation Confirm It's Too Soon to Bet Against the U.S.

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It is too soon to bet against the U.S. as bumper earnings and a softer than expected inflation print pave the way for further outperformance of U.S. assets.

U.S. equity markets and the Dollar look set to extend a period of outperformance as U.S. earnings data points to a strong economy that provides a compelling fundamental narrative for investors to increase exposure to U.S. assets.

"Stocks seem to have found their footing, helped in a big way by U.S. inflation and earnings data," says Chris Beauchamp, Chief Market Analyst at IG.

Goldman Sachs said its fourth-quarter profits more than doubled to $4.1BN, helped by strength in its investment bank, expansion of its money-management business and a surprise $472 million gain from balance-sheet bets.

The country's biggest bank, JPMorgan, said its trading division recorded its biggest fourth-quarter profit ever, boosted by volatility tied to the US elections in November. BlackRock, the world's biggest asset manager, reported forecast-beating revenues despite assets under management coming in below expectations.

Citigroup, the US's third-largest bank by assets, reported higher-than-expected fourth-quarter profits on Wednesday, earning $2.9BN in the final three months of last year.

"Corporate America is performing well under the pressure of elevated borrowing rates, which indirectly allows the Fed to adopt a more cautious stance and abstain from excessive rate reductions in 2025," says Andreas Charalamboux, Market Analyst at t4trade, a broker and trading journal provider.

Gains in U.S. stock markets follow a below-consensus inflation print for December, which saw traders raise bets for a U.S. rate cut in June.

This capped a rise in U.S. bond yields that threatened to tighten U.S. financial conditions and pose headwinds to economic growth.

U.S. core CPI fell to 3.2% year-on-year from 3.3% (expected: 3.3%), marking the first drop since July. U.S. super-core inflation, which is core inflation minus rents, remains elevated but is still trending lower.

Headline CPI inflation rose to 2.9% year-on-year in December from 2.7%, increasing bets for the next Federal Reserve interest rate cut falling in June, with a second likely in H2.

"US equities surged, following a lower-than-feared US inflation reading. Bond yields are down across the board, and the USD is down on major crosses," says Roger Degen, Equity Research Analyst at Julius Baer.

"The unexpected drop in core inflation is an encouraging sign, suggesting inflationary pressures could be diminishing faster than anticipated. Coupled with a moderated PPI, it bolsters the narrative that the Fed may have room to adopt a more accommodative stance in its monetary policy moving forward," says Quasar Elizundia, Expert Research Strategist at Pepperstone.

However, U.S. stocks are poised for a challenging year as market vulnerabilities come to the forefront, warns Nigel Green CEO of deVere Group; "rising bond yields and potential disappointments in economic data or earnings are key threats that could derail the rally."

The U.S. ten-year bond yield, a key measure of U.S. financing costs, this week peaked at 4.80% and markets are wary of the 5.0% level being breached before the month is out.

"The complacency among investors regarding inflation and interest rates is alarming," says Green, who forecasts that "US interest rates could rise above 5%, a level not sufficiently priced into the market."

This speaks of tightening financial conditions for businesses and consumers while also raising the attractiveness of government sovereign bonds relative to equities.

The U.S. equity market rally of the past two years ranks in the 93rd percentile over the past century, leaving markets "increasingly susceptible to corrections."