What to watch in the week ahead

• The US earnings season got underway last week, led as usual by financials. Supportive fundamentals helped financials shrug off the threat of caps on credit card interest rates. What's in store for the rest of the market as earnings season gathers pace?
• The end of last week brought some easing in geopolitical uncertainty, but this was followed by rising transatlantic tensions over the weekend concerning Greenland. Where are the potential geopolitical offramps, and what does uncertainty mean for gold?
• US CPI data last week showed contained inflation. While fourth-quarter GDP estimates appear firm, US labor data remains cool. Will this week’s PCE data confirm subdued price pressures, and what does it mean for US interest rates and Fed policy?

Will earnings growth support further equity gains?

Bank stocks came under pressure at the start of last week after President Trump’s proposal to cap interest rates on credit cards, but strong earnings from Morgan Stanley and Goldman Sachs helped drive a turnround later in the week.

Regarding a cap on credit card rates, even if it were imposed, we believe the impact would likely be limited. It would probably apply only to new loans, issuers could offset lost income with new fees, and credit card firms could cut back lending activity to focus on margins over volumes.

We rate financials as Attractive and think continued gains in capital market activity and improving net interest margins should drive further valuation gains in financials.

More broadly, resilient economic growth in the fourth quarter of 2025 should support corporate profits, and the outlook for this year is improving. Fiscal stimulus measures from the One Big Beautiful Bill Act (OBBBA) will come into play in the first half of this year. In addition, the ongoing effects of Fed rate cuts, continued AI adoption, and the easing of tariff headwinds should all be positive for GDP growth. We expect the US economy to expand by over 2% this year, which should sustain earnings momentum.

Overall, for the S&P 500, we expect earnings per share growth of 12% in the fourth quarter of 2025 and 2026. We rate US stocks as Attractive and see the S&P 500 reaching 7,700 by December. We're looking for signs of a broadening in US earnings growth across sectors in this week's earnings releases from across the financials, consumer, industrial, and raw materials sectors.

Beyond opportunities in financials, we believe incremental investor inflows into the health care sector should continue, with obesity remaining a key theme. Nearly a billion people worldwide are living with obesity, and demand for effective, safe, and convenient obesity treatments should continue to support a robust runway for future expansion. Additionally, multiple late-stage clinical trial results expected in oncology, metabolic, and cardiovascular studies this year may boost investor optimism, while continued M&A activity supported by financial flexibility signal confidence and growth.

We also believe the AI theme is broadening into the application and intelligence layers, with investors increasingly rewarding those able to generate profits from AI investment. With revenue growth at cloud service providers likely to accelerate further, we expect large tech companies to remain a key driver of S&P 500 profit growth.

Can gold prices rally further?

Press reports at the end of last week stated that diplomatic efforts to dissuade President Trump from striking Iran had managed to de-escalate tensions in the region. The news prompted a sharp drop in oil prices on Friday. Gold, however, struck record highs at the end of last week and the beginning of this one, on rising safe-haven demand after President Trump threatened to impose extra tariffs on European countries over the control of Greenland.

The situation in the Gulf remains fluid, and it remains to be seen whether the apparent de-escalation proves durable. But even if tensions recede over Iran, geopolitical risk remains elevated elsewhere, with weekend developments over Greenland adding to continued uncertainty in Venezuela and tense relations between China and Japan.

On Greenland, we see three potential scenarios for how the current tensions could be resolved:

The Trump administration establishes free military and resource access without acquiring Greenland. The US already has the right to expand its military presence in Greenland under a 1951 defense agreement, and Greenland has shown openness to increased commercial US activity. Denmark and NATO have also signaled their readiness to increase spending on infrastructure and defense capabilities in Greenland. At present, however, Trump has said that “[c]ountries have to have ownership and you defend ownership, you don't defend leases.” This suggests concessions by Greenland and Denmark that stop short of sovereign rights may not be enough to satisfy US demands.

The US gains (quasi) sovereignty over Greenland by non-military means: Such a scenario could include treaties that allow the US full control over certain territories, or a closer relationship between Greenland and the US after the former becomes independent, although this route could take several years.

The US declares control over Greenland, potentially backed up by an increased military presence: Denmark’s and the EU’s military capabilities are likely insufficient to prevent a military-backed takeover of Greenland by the US. This course of action would increase the rift within NATO and would likely face resistance from within the US, including from Congress.

Lingering geopolitical risks are likely to underpin hedging demand for gold, which also enjoys fundamental support. We expect US real yields to decline as the Fed eases policy further while inflation remains sticky, boosting the appeal of gold. Fears over rising global debt levels and US public finances as well as central bank reserve diversification provide further support. We see bullion reaching USD 5,000/oz in the coming months and think it could rise as high as USD 5,400/oz if political or financial risks increase.

What does the latest inflation data mean for Fed policy?

US domestic risks receded at the end of last week, as President Trump said he had no plans to fire Fed Chair Powell, despite a Department of Justice investigation. The investigation could delay the appointment of the next Fed chair, but our view is that policy will continue to be determined by inflation and labor market fundamentals.

US December core CPI rose by 2.6%, below expectations for 2.8% but still above the Fed’s 2% target. This week brings PCE data, the Fed’s preferred inflation measure, with consensus expectations for a 2.7% rise.

Our view is that inflation is likely to stay contained, allowing the Fed to focus on employment risks. Fed communication has implied a higher bar for additional cuts, but the Fed’s labor market concerns should remain elevated amid slower job growth in the private sector. We expect the labor market to remain weak, and two additional payroll reports ahead of the March policy meeting are likely to be followed by a 25-basis-point interest rate cut.

So, we maintain the view that further Fed easing remains in store. Lower interest rates strengthen the case for investors to put surplus cash to work, including phasing excess liquidity into diversified portfolios. We still like quality bonds, but see merit in finding alternative sources of portfolio income for diversification. Hence, we like medium-duration quality bonds and equity income strategies (especially in Switzerland and Southeast Asia) as appealing. We also expect lower interest rates, robust corporate earnings, and AI tailwinds to support further gains for equity markets over the coming year. Investors underallocated to equities should consider adding to stocks in CIO's preferred areas, including our Transformational Innovation Opportunities of AI, Power and resources, and Longevity.