January jumpstart: Earnings, executive orders and the AI earthquake

What. A. Month.

January brought a strong start to the fourth quarter corporate earnings reporting season, with more than three quarters of S&P 500 companies beating expectations. President Trump signed more day-one executive orders than the past 10 presidents combined. The artificial intelligence (AI) landscape was shaken up with the introduction of a new open-reasoning Large Language Model that rivals the performance of top incumbents, purportedly at a fraction of the training and operation costs.

It was a lot to digest, and market performance suggests that investor sentiment remained resilient to the new uncertainty. The world’s major market segments all outperformed cash, with gold leading the way and global stocks offering a strong showing – despite declines in some notable mega-cap market leaders. Read on for a rundown of January’s defining dynamics around earnings fundamentals, Trump administration priorities and the AI ecosystem. 

Earnings results: A solid fundamental backdrop

History shows that earnings drive stock performance over the long run, and the start of the fourth quarter earnings season offered reinforcement for the current market rally. While just under 40% of S&P 500 companies reported results in January, about 77% of them surpassed consensus earnings per share (EPS) estimates – in-line with the one-year and five-year averages. As a result, index-level growth expectations for the quarter have been trending higher, standing at 13.2% as of the end of the month (compared to 11.9% expected at the start of the season). The financial sector comprises many of the early reporters, and results were exceptional: Nearly every company in the group exceeded expectations by a significant margin, showcasing a sector-level earnings beat spread of around 11%.

In addition to financial, sectors such as communication services, information technology and consumer discretionary have so far reported solid year-over-year earnings growth. The sore spots are energy, industrials and materials, each of which is pointing towards a year-over-year decline in earnings.

Abroad, European luxury companies have been the stand-out strong performers, leading the way in the region's equity outperformance over the U.S. throughout the month. Better-than-expected economic data, namely an improvement in the Purchasing Manager Index activity indicator, helped as well.

Executive orders and market expectations

President Trump wasted no time in setting his administration’s agenda, with executive orders spanning various policy areas. To assess the potential market impacts, investors may be best served by focusing on those related to three categories: trade policy and tariffs, the labor market and deregulation.

Trade policy dominated the spotlight as the month came to a close, with tariffs on Canada, Mexico, and China announced and originally supposed to take effect in early February. In short order, the tariffs on Mexico and Canada were delayed as both promised new measures to tighten border controls to stem the flow of immigration and drug trafficking. That supports the idea that the Trump administration seems to view tariffs as a tool in negotiations, if not also potential sources of revenue generation. Regardless, if tariffs are implemented and sustained, they could create economic growth headwinds and inflationary impulses. Uncertainty remains, but one thing looks likely: The dawn of a trade war could weigh on investor sentiment and stoke market volatility in the month ahead.

On the labor front, consider immigration policy and its potential implications for workforce availability and wage dynamics. The tie to the economic outlook rests in the potential regional or sectoral labor disruptions, particularly in states like California and Texas and industries such as construction and agriculture that have a relatively larger representation of undocumented workers. For now, we don’t see a high likelihood that such policies will disrupt the restoration of balance between labor supply and demand at the national level, but it’s a risk worth watching.

In terms of deregulation, the administration is promoting traditional fossil fuels and discouraging renewable energy development. Executive orders have been issued to increase domestic energy production, aiming to lower energy prices. However, challenges remain in ramping up production, particularly with pipeline projects.

An AI earthquake: The download on DeepSeek

The release of a new AI model from Chinese startup DeepSeek sent ripples through stocks tied to the AI value chain, challenging key assumptions about the trajectory of AI. For starters, investors were forced to question whether AI proliferation will still require the massive investment in advanced semiconductor chips that many expected – hence Nvidia’s -17% single-day decline that wiped out a record $589 billion of market capitalization.

DeepSeek's model also demonstrates a significant efficiency breakthrough, with the potential to reduce AI energy requirements through its "Mixture of Experts" system. This efficiency could lead to an acceleration of broader AI adoption due to lower costs, aligning with the now-buzzy idea of “Jevons Paradox”. According to this theory, as technological advancements make AI more efficient and affordable, overall usage is likely to increase, ultimately benefiting the market and economy.

While the AI trade is not over, it is evolving rapidly, offering both risks and opportunities. Lower costs could drive greater adoption, benefiting sectors that leverage AI technology. To dive deeper, see our recent Top Market Takeaways note on the topic.

Wrapping up

Overall, January’s market gains were anchored by strong earnings and a generally stable economic backdrop, even as investors grapple with policy changes and the AI breakthrough. As we look toward 2025, we remain optimistic about capturing market upside while emphasizing the importance of portfolio resilience. Explore more in our year-ahead outlook, Building On Strength.

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