Can Wall Street earnings save the stumbling US stock rally?

The U.S. stock market is losing its swagger. The S&P 500, Wall Street’s ultimate scorecard, dropped to levels last seen on November 5, the day before Donald Trump secured his second presidential term.

Investors aren’t just jittery—they’re running for the exits. Stocks are being dumped, bond yields are surging, and inflation fears have everyone sweating. Even the Federal Reserve is having the worst time.

At press time, the S&P 500 was down 0.6%, hanging at 5,793 after hitting a low of 5,773 earlier in the session. Just days before the election, the index sat at 5,782.76.

Trump’s win initially lit a fire under the market, with the S&P jumping 2.5% the day after and soaring another 5.3% by December 6. Fast-forward to now, and that rally is history—the index is down nearly 5% from its peak.

Rate worries, inflation, and the Trump effect

So, what’s killing the buzz? First, the economy isn’t looking so hot. Growth feels shaky, stock prices are sky-high, and everyone’s starting to doubt whether the Federal Reserve will deliver those sweet, sweet rate cuts this year.

Throw in Trump’s trade policies—tariffs on imports and deportations of undocumented workers—and you’ve got a recipe for anxiety. The bond market is already bracing for impact. Yields on 20-year Treasuries shot past 5%, while the 30-year yield flirted with that milestone before easing slightly.

Meanwhile, the 10-year Treasury yield, which drives everything from mortgages to corporate borrowing, is surging too, now at its highest since October 2023. Rising yields mean bonds look more appealing than stocks, adding pressure to an already teetering market.

Wall Street’s famed fear gauge, the Cboe Volatility Index (VIX), is doing what it does best—spiking. It’s sitting above 20, a level that screams, “Traders are freaking out.”

According to Michael O’Rourke, chief market strategist at JonesTrading, “This is a case of high expectations crashing into reality.” Translation? Turning campaign slogans into actual policy is a slog, and Wall Street hates uncertainty.

They’re set to be a cornerstone of Trump’s agenda, and markets aren’t thrilled. Tariffs slow growth, raise costs and throw a wrench into global trade. Investors had their honeymoon phase with Trump’s policies back in 2017. Now? Not so much.

A different market, tougher times

This isn’t the same market Trump inherited in 2017. Back then, stocks weren’t wildly overpriced. The S&P 500 had gained a modest 8.5% over the previous two years and was coming off a 9.5% rise in 2016.

Compare that to today: since the end of 2022, the index has skyrocketed over 50%, posting back-to-back annual gains of more than 20%. In 2024 alone, it set over 50 record highs. The result? A market stretched to its limits.

The post-election rally that followed Trump’s latest win is fading fast. The Dow Jones Industrial Average, which initially surged, has now erased all its gains since Election Day and sits 0.7% lower than its November 5 level. The Russell 2000, known for its focus on smaller companies often seen as Trump beneficiaries, has tumbled 10% from its late November highs.

Rising bond yields are throwing another wrench into the works. After Friday’s blockbuster jobs report, doubts about Federal Reserve rate cuts have skyrocketed. Investors were banking on the central bank lowering rates to keep stocks afloat, but now that seems like wishful thinking.

As government bond yields climb, stocks look less attractive. The Fed started easing rates from a 20-year high last fall, offering hope to the markets. However, the strong economic data is making policymakers rethink that approach.

Rate cuts are a boon for stocks, boosting growth and making bonds less tempting. Without them, Wall Street will have to lean heavily on corporate earnings to keep the market alive.

Earnings season: Make or break for stocks

Corporate earnings are about to take centre stage, and the stakes couldn’t be higher. “This fourth-quarter earnings season is probably one of the most consequential earnings seasons that we’re going to see in a long time,” said Larry Adam, chief investment officer at Raymond James.

Investors are desperate for reassurance, and the numbers will tell all. Big names are up first. JPMorgan Chase, Wells Fargo, Citigroup, and BlackRock—Wall Street giants—will release their results soon. Analysts expect companies in the S&P 500 to report a 12% profit jump from a year ago.

That’s the biggest gain since late 2021 but falls short of the 14.5% growth predicted just a few months ago. But it’s not just about the numbers. Investors want to hear how CEOs plan to deal with Trump’s populist agenda.

Tariffs could raise costs for companies importing goods and force them to pass those costs to consumers. Trade policies and mass deportations might also push inflation higher, putting even more pressure on the Fed to keep rates up.

Consumer spending, a key driver of the economy in 2024, is showing cracks. Holiday shopping data revealed a tale of two Americas: wealthy shoppers splurged on luxury goods, while lower-income households struggled with basic expenses like groceries and childcare.

The early earnings reports aren’t looking great either. Nike reported a dip in sales, FedEx cut its forecasts, and Conagra Brands—maker of pantry staples like Swiss Miss and Pam—warned about inflation and a strong dollar hitting its bottom line.

Despite the challenges, analysts still expect corporate profits to grow by 15% in 2025. But hitting that target won’t be easy.

Stocks are already expensive, trading at about 22 times their projected earnings for the next 12 months—well above the 10-year average of 18.5 times, according to FactSet. Companies will have to deliver exceptional results to justify these valuations.

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