Chinese Exports Soared 22% Before Middle East War Broke Out

Exports soared almost 22% from a year earlier, compared with a 7.2% median estimate in a Bloomberg survey of economists. Imports jumped nearly 20%, according to a statement released by the General Administration of Customs on Tuesday, leaving a surplus of $214 billion — an all-time high for the period. (…)

China last year relied on outbound shipments to drive the economy, with net exports contributing almost a third to the overall expansion in gross domestic product — the most in decades. (…)

Already, the world’s largest container carriers are rerouting ships to avoid the Persian Gulf, while major e-commerce platforms are warning of longer delivery times to the Middle East. (…)

The US was the only major region to see a decline in Chinese exports in January-February, according to the latest data, with sales down 11%. Shipments to Africa surged nearly 50% during the period — the fastest increase globally — followed by a jump of over 29% to the Southeast Asian nations in the Asean group and a nearly 28% gain to the European Union. (…)

Exports of mechanical and electrical products soared more than 27% in the first two months, including a nearly 73% spike in sales of integrated circuits and a 67% increase in cars.

Imports of crude and refined products by volume rose almost 16% and over 43%, respectively, although the value of oil purchases slipped more than 5%.

China’s export growth probably benefited from a US Supreme Court ruling in February that struck down Trump’s reciprocal tariffs, according to Ding at Standard Chartered, because the verdict might have prompted companies to front-load orders in anticipation of other levies from the White House. (…)

BTW:

China purchased more crude in the first two months of the year as the country continued to hoard oil to guard against supply disruptions. (…)

China has about 1.4 billion barrels of crude — or 190 million tons — in strategic storage, according to Erica Downs, senior research scholar at Columbia University’s Center on Global Energy Policy. Even if all the country’s imports from the Middle East were cut off, those stockpiles could cover the lost supplies for six months, she said. (…)

Trump Doesn’t Understand His Enemy. That Gives Iran an Edge.

Iran’s appointment of Mojtaba Khamenei as supreme leader has been likely since the day US-Israeli air strikes “martyred” his father. It became inevitable the moment Donald Trump said he’d be an “unacceptable” choice for the US, better known to those doing the selecting as The Great Satan.

Trump’s tone-deaf demand was just the latest in an accumulating body of evidence that suggests the US president profoundly misunderstands his opponents in Tehran. That failure to “become your enemy,” as ancient China’s The Art of War advised, may now be threatening the future of the global economy.

It is hard to imagine a scenario in which Mojtaba’s ascent turns out to be a good outcome for America’s latest war of choice in the Middle East, or for Iranians. Far from regime change, his selection as supreme leader represents regime consolidation. It makes any transition to a less confrontational Iran — let alone a secular democracy — still less likely than it was before.

Mojtaba Khamenei is a cleric and political hardliner, who has deeper ties to the Islamic Revolutionary Guard Corps than his father did. (…)

To hear it from Trump, it’s all over bar the shouting. “You know, Iran was supposed to be this big powerful country; we’ve rapped the hell out of them,” he said in remarks to a Republican conference on Monday. “And you know, I don’t know when they cry uncle. They should have cried it two days ago, right? But they don’t have anything left.”

And yet, it seems they do. To “win” this war they now need just to survive it. And to achieve that they must stick together, which they seem to be doing. Their strategy is by now evident: To outlast Trump by inflicting pain on US allies and global energy markets. And from where they stand, they can still win.

Only a fortune teller can say whether the IRGC and other institutions of the Islamic Republic can endure the extraordinary levels of punishment that US and Israeli jets and missiles are meting out, and still be able to fight back, suppress domestic dissent and govern should this continue for weeks or months. Nor can we know how long Mojtaba Khamenei will survive his father, given the way Israel is hunting Iran’s political and security leaders from the sky. But what’s clear is that Trump has failed to understand their rules for the game.

Assuring the rise of the new supreme leader he didn’t want by demanding that the IRGC give him veto power over Mojtaba’s appointment was just Exhibit A. Exhibit B came from Steve Witkoff, Trump’s friend and envoy to everywhere, a week before hostilities opened. He told Fox News that the president was “curious” as to why the Iranians hadn’t caved to his demands, when they could see the sheer scale of the firepower he’d amassed to attack them. On Monday, Trump again seemed surprised they hadn’t yet folded.

Trump knows a lot about leverage. He spent a lifetime assessing when he had enough to prevail in a business deal and, when what’s at stake is money or property, that’s likely all he needed to know. But war is different; in contests between states, leverage can be asymmetric.

This misapprehension can be seen right back to Trump’s infamous White House clash with Ukraine’s Volodymyr Zelenskiy, where he kept repeating that Ukraine had no cards to play in its war with Russia. This is the same country that had already defied a dramatically stronger opponent for three long years and has continued to do so since. Clearly it had cards. In fact, Trump is now asking Zelenskiy to provide some of them to help shoot down Iranian drones in the Gulf. (…)

Asymmetry is a lesson the Iranians themselves learned the hard way, during their 1980-1988 war with Iraq, which at the time was backed by the US. That conflict ended in a stalemate, despite Iran’s near three-to-one advantage in population size. Everything about the way the Islamic Republic developed its security forces since has been based on the conclusion that it must never again fight such a toe-to-toe conventional war.

That’s one reason for lavishing resources on the IRGC and its elite Al-Quds units, rather than on the regular army, known as Artesh. So, too, constructing an arsenal of missiles, rather than an air force to compete with America’s or Israel’s. Likewise, Iran’s early mover status on large-scale attack drone production; the choice to build swarms of tiny speedboats as a naval strike force; the development and arming of proxy militias across the region as a so-called “forward defense” strategy, and of sleeper cells around the world.

In other words, Iran has been preparing for this fight since 1988. It expected to be outclassed in the air. It expected decapitation strikes and had succession and decentralization plans in place. Such a regime is unlikely to collapse or split. It is ready for a long war.

Trump needs to decide now if he is, too. Can he stomach the inflationary impact of a $100-plus oil price for months if need be? Or anger from Gulf allies as Iranian drones tear their energy and tourism infrastructure apart? Or attrition in critical munitions stocks that could for several years limit American security choices? If the answer is no, the time to declare victory and find an off-ramp is now. Maybe that’s what he was doing on Monday with his boasting and suggestion that the war was near an end. But he also said the US wouldn’t relent “until the enemy is totally and decisively defeated.” That could be a while.

If Trump really is willing to do whatever it takes to destroy the Islamic Republic, he needs know his enemy better and get ready to fight the IRGC on the terrain it prepared, which is everything from small boats to terrorism.

But there’s also Israel, which has clear goals on Iran and none of Trump’s domestic preoccupations. Trump’s off ramps may not suit Israel…

Ed Yardeni:

In effect, Trump said that the mission is almost accomplished. Not so fast, according to Secretary of Defense Pete Hegseth. In recent briefings at the Pentagon, he has shifted from his initial “short war” rhetoric. He recently stated that while the US is “winning decisively,” the military will take “all the time we need” to ensure success. Specifically, he noted the timeline could stretch to six or eight weeks—nearly double the President’s initial 4-week estimate—depending on how quickly they can achieve “uncontested airspace” over Iran.

Secretary of State Marco Rubio has also been more cautious about the “endgame.” He recently emphasized that the mission is about “denying Iran the ability to use ballistic missiles,” a goal that requires a sustained campaign of “finding, fixing, and finishing” mobile launchers that are difficult to track. He suggested this process would be ongoing rather than a one-time strike.

We feel better than we did over the weekend, sort of. We would feel much better (and more bullish) if we saw some ships sail through the Strait of Hormuz without getting attacked by Iranian suicide drones.

As a reminder:

Trump’s nod toward de-escalation was significantly different from what he wrote in the early hours of Saturday morning. In a social media post, Trump, 79, said the US will consider striking areas and groups of people in Iran that were not previously considered targets. “Today Iran will be hit very hard!” Trump said as the US and Israel were bombarding Tehran and other cities over the weekend. The attacks will continue, Trump wrote, “until they surrender or, more likely, completely collapse!” (Bloomberg)

What, Me Worry?

“I have a plan for everything, okay?” Trump said in a brief phone interview Monday on the 10th day of the joint US-Israeli war with Iran. “I have a plan for everything. You’ll be very happy.” (AP)

• Iran is a crucial test case for the American way of war The conflict in Ukraine seemed to cast doubt on a military model based on overwhelming air power

(…) The American way of war is long-range, precise and depends on overwhelming domination. The assumption is that quality — expensive technology and well-trained personnel — can achieve victory with limited risk to American lives. By targeting key leadership, bases and capabilities, well-executed precision strikes can induce changes in the enemy’s foreign policy, regime collapse or even surrender, all without ever having to face the adversary on the ground. (…)

Some wonder why the US hasn’t more fully absorbed the lessons of Ukraine. Why hasn’t it replenished its arsenal with cheap munitions and drones, abandoned its expensive platforms and redesigned its campaigns to support multiyear fights to take or defend territory? This is not merely the result of bureaucratic inertia, however. On the contrary, America has a deeply rooted belief in its own way of waging war and a distinctive understanding of how new technology (drones, AI and so on) can enable it.

Operation Epic Fury can, in many ways, be seen as a compelling counter-example to the dystopian vision of conflict that the war in Ukraine represents. On the first day, the US-Israeli operation decapitated the head of a despised regime. And it attacked more than 1,200 targets, with the loss of just six American military personnel. It has rebuffed one of the largest missile volleys ever launched and a US submarine destroyed an enemy warship with a torpedo for the first time since the second world war. 

But there are already cracks in this account. The US may have accidentally attacked a school, killing over 100 children. (As of the end of last week, defence secretary Pete Hegseth said the Pentagon was still “investigating”.) Three F-15s were shot down by friendly Kuwaiti fire. The Trump administration has been elusive on strategic objectives, the possibility of deploying ground troops or campaign timelines.

Meanwhile, American missile and bomb arsenals are dwindling and costs soaring. For nations watching and wondering whether to invest in the Ukrainian or American military model, Operation Epic Fury is an important test case. Should they be arming for wars of attrition or for the kind of technological dominance showcased over the past week?

How this all ends will shape Iran and the region, but it will also dictate the future of the American military. Imagine, for a moment, that the US is unable to achieve a decisive victory, and is instead drawn into a long, costly and complicated nation-building exercise or guerrilla war. If that happens, the failure of the ideal case will force the military to rebuild its arsenal and transform its strategy in order to equip it for a very different kind of warfare — one that looks a lot more like Ukraine than the first Gulf war.

• U.S. dismissed Ukraine deal for anti-Iran drone tech last year

Nearly seven months ago, Ukrainian officials tried to sell the U.S. their battle-proven technology for downing Iranian-made attack drones. They even made a PowerPoint presentation — obtained exclusively by Axios — showing how it could protect American forces and their allies in a Middle East war.

The Trump administration dismissed the Ukrainians, only to reverse course last week because of more-than-expected drone strikes from Iran.

Snubbing Ukraine’s offer ranks as one of the biggest tactical miscalculations by the administration since the bombing of Iran began Feb. 28, two U.S. officials tell Axios. (…)

Ukraine is the world’s most experienced country in combating Shaheds, which Russia has bought, reproduced and labeled as Geran drones by the thousands for its invasion of its western neighbor.

Ukraine has developed a low-cost interceptor drone, among other sensors and air defenses, to shoot down Shahed-style drones.

At a closed-door White House meeting on Aug. 18, the Ukrainians made a PowerPoint presentation to U.S. officials that displayed a map of the Middle East and had this prophetic warning: “Iran is improving its Shahed one-way-attack drone design.”

A U.S. official who saw the PowerPoint confirmed that Zelensky’s team showed the presentation to the administration and theorized the Ukrainian leader is seen by some in the Trump administration as too much of a self-promoter of a client state that doesn’t command enough respect.

“We figured it was Zelensky being Zelensky. Somebody decided not to buy it,” the official said.

On Thursday, the U.S. formally asked Zelensky for anti-drone help, according to The New York Times. (…)

On Friday, the U.S. announced plans to deploy its own Shahed-killing drone system, called Merops, amid complaints from regional allies about the attacks.

One U.S. official told the Associated Press that the response to Iran’s drones has so far been “disappointing.” (…)

The need for the technology is so great that Trump’s sons announced a new business venture Monday to supply the Pentagon with Ukrainian drone technology. (…)

Months later, in November, another U.S. official told Axios that military personnel have “been wanting to go to Ukraine and pull the tech and the tactics from the Ukrainian military … so that we’re innovating and learning.” (…)

While equity and commodity investors react to every Trump utterings:

Credit investors’ stress levels are far from healthy. Globally, measures of perceived risk continue to deteriorate. A weak US February jobs report is the latest catalyst in the Markit CDX North American Investment Grade Index’s spread widening by the most since last May:

The raging war in the Middle East has combined with cockroaches in private credit to make creditors’ lives unusually difficult. Their pain is slowly reverberating from Tokyo to New York.

Worse, the meltdown sparked by AI’s looming disruption of software firms is continuing to ripple through markets as investors scramble for safety and unwind crowded trades. The world’s largest alternative asset managers now face an uncomfortable dilemma: Block investors seeking to exit private-debt funds and risk reputational backlash, or honor the redemptions and undermine the industry’s promise of patient, locked-up capital. The recent episode at Blue Owl Capital is still fresh in investors’ minds, and press scrutiny of the asset class is continuing at a far higher level than for most of last year. (…)

These are tough conditions, although certainly nowhere near crisis. (…)

Across the Atlantic, the picture is less reassuring. Nearly 150 companies have already ceded control to direct-lending funds after they could no longer service their debts, according to Goldman Sachs Group, showing that private credit strains are spreading. On that basis, it is not surprising that Monday’s surge in the credit risk benchmark culminated in a pause in bond sales.

With oil prices soaring during the European session, there were concerns that this would weaken corporate balance sheets, and intensify repayment risks. A handful of corporate and financial-sector borrowers that had been looking to raise debt in Europe stood down. With deals already delayed last week, a pipeline of issuers is now waiting to tap the market when they get the chance. (…)

This is a fragile time for credit markets, but credit investors are no strangers to market stress. In the past, such incidents have often been followed by strong demand and a “buy-the-dip” mentality. That might yet happen this time — depending on just how deep the dip gets. (Bloomberg’s Richard Abbey)

White House readies executive order to weed out Anthropic

The White House is preparing an executive order formally instructing the federal government to rip out Anthropic’s AI from its operations, sources familiar with the matter told Axios.

The move would escalate the administration’s fight with Anthropic, which is already suing the Pentagon over its supply chain risk designation.

It would also formalize a broader push across agencies to remove Claude after President Trump said his administration would not use “woke” AI. (…)

• Microsoft and Anthropic team up to bring Claude Cowork to Microsoft 365

Microsoft is bringing Anthropic’s Claude Cowork to its Microsoft 365 Copilot AI platform. Called Copilot Cowork, the update arms Microsoft with the AI platform that rocked the software-as-a-service industry last month. (…)

Yardeni Raises Odds of US Market Meltdown to 35% on Iran War

Yardeni has raised the probability of a market meltdown to 35% for the rest of the year, up from 20% previously. At the same time, he slashed the odds of a meltup — a rally driven more by investor enthusiasm than underlying fundamentals — to just 5% from 20%. (…)

“The US economy and stock market are stuck between Iran and a hard place currently. So is the Fed,” Yardeni wrote in a note. “If the oil shock persists, the Fed’s dual mandate would be stuck between the increasing risk of higher inflation and rising unemployment.” (…)

His base case remains intact. The so-called “Roaring 2020s” scenario, which envisages a decade of robust and sustainable US growth fueled by rapid productivity gains, still carries a 60% probability through the end of the year.

The outlook is better over the coming decade. Yardeni assigns an 85% chance of a continuation of the Roaring 2020s. He also sees a 15% chance of a “stagflating 1970s redux.”

“If investors start expecting stagflation, a bear market is more likely,” he wrote.

The WSJ account omitted these other comments:

According to Polymarket.com, the odds of a recession this year jumped to a three-month high of 34% on Friday from 21% on Wednesday, February 25, just before the war started. We started to see trouble ahead last week on Tuesday, when we predicted a 10%-15% correction in the S&P 500 because of the war. Now we can’t rule out a bear market and even a recession. It all depends on how long the Strait will be closed, obviously. (…)

We are also tracking Polymarket.com for the odds that the House of Representatives will flip from a Republican to a Democratic majority. It wasn’t looking good for the Republicans even before the war.

It also isn’t looking good for the stock and bond markets. Both the S&P 500 and Nasdaq are likely to fall below their 200-day moving averages on Monday

 

The 10-year US Treasury bond yield has been remarkably subdued, between 4.00% and 4.25%, over the past year. Soaring oil prices are likely to disturb that calm, sending the yield higher. Commodity price indexes excluding crude oil and petroleum products are likely to tumble on recession fears. Even the price of gold has stumbled because the oil shock has boosted the dollar’s foreign exchange value. (…)

BTW: Prediction markets, the flavor of the moment, see the chances of a swift conclusion as having ebbed swiftly over the last week, and now put a 48% probability on the notion that there still won’t be a ceasefire by the end of next month.

Iran has identified Trump’s Achille’s heel: affordability and the stock market.

• US average gasoline prices have already shot up 16% to $3.44.

• Worse still, crop prices are on the rise with further room to surge should the war persist. The Iran situation is stalling access to the country’s low-cost urea and ammonia facilities, vital for agricultural fertilizers, which account for about 5% and 11% of global trade in fertilizers, respectively. This assumes much of their infrastructure survives the bombardment. So far, urea prices have shot up by about 25% since the outbreak of war (…). Roughly 45% of global urea trade is sourced from producers with manufacturing sites in the Persian Gulf and shipped to major import regions, including India, Europe and Brazil, via the Strait of Hormuz. The commodity is benefiting from an additional lift from rising prices of natural gas, a crucial element in fertilizer production. (John Authers)
• Food prices, in particular, became a big issue in the last presidential election, and have appeared to be coming under control. A reversal would be unwelcome.
• Prices for chemical fibers such as polyester and acrylic — oil byproducts used in garment manufacturing — have risen more than 10% since the US and Israel started strikes on Iran over a week ago, according to seven apparel manufacturers in southern and eastern China interviewed by Bloomberg News. Fiber suppliers are now adjusting prices once or even twice a day to keep pace with volatile crude markets, the manufacturers said. (Bloomberg)
• Suddenly, US oil imports from Canada (4.4Mb/d) are welcome… While the US produces a record amount of its own light oil, its refining complex (especially on the Gulf Coast and in the Midwest) is heavily geared toward the heavy crude specifically supplied by Canada.
• G7 to discuss joint release of emergency oil reserves

February Employment: What the Jobs Report Giveth, It Taketh Away

Solid job growth in January gave way to a 92K decline in nonfarm payrolls in February. Private payrolls fell by a similar 86K, the largest decline in private employment since December 2020. Some of this weakness can be attributed to one-off factors, such as poor weather and strikes. But even excluding these factors, February employment growth along with downward revisions to the prior two months leaves job growth weak. (…)

Today’s data will challenge what was a growing view among Fed officials that the labor market is stabilizing, and the Iran conflict further compounds the outlook. Ultimately, the Federal Reserve cannot do much to combat higher inflation from a supply-side oil price shock. Yet, the inflationary impact of the conflict in Iran makes it harder to be a dove at the moment. (…)

The contraction came on the heels of downward revisions to January (-4K) and December (-65K), leaving the three-month average pace of job growth at a meager 6K last month compared to 73K headed into this report.

There were some idiosyncratic factors at play. Approximately 31K nurses and other healthcare professionals were on strike in February, underpinning the 19K job decline in the healthcare & social assistance industry which has been the stalwart of overall job growth. With the strike already ended, these workers will be back on the payroll in March, leading to a commensurate lift to healthcare hiring in next month’s report. Elsewhere, back-to-back harsh winter storms restrained hiring in weather-sensitive industries, such as construction and leisure & hospitality, where payrolls slipped. Federal government payrolls also continue to decline, albeit the pace of contraction is slowing. (…)

With a lower run-rate for job growth, it is becoming less unusual for payrolls to veer into negative territory at times, particularly when there are temporary factors that reduce hiring.

ING:

(…) Essentially, the jobs market is just treading water with payrolls trending at around 50k per month. The job concentration risk point still holds though. Three sectors (government, leisure & hospitality and private education & healthcare services) are still responsible for all job creation over the past three years. All other sectors combined (essentially the bulk of the US economy) have lost 460k jobs since December 2022.

Cumulative job increases since December 2022

We know that there are more unemployed Americans than there are job vacancies and this is now depressing wage growth. Average earnings did rise 3.8% year-on-year in today’s report, but that is likely due to lower wage workers not being able to get to work and not being reported and skewing the reported earnings in favour of higher-earning office workers who could work from home.

The broader measure of wage growth within the employment cost index risks dropping below 3% YoY and we already know that real household disposable incomes are flat lining. The surge in energy costs, particularly for gasoline, that we expect over the next few weeks in response to global market moves, means that we could see real disposable incomes turning negative. That risks creating an intensifying headwind for growth in the second half of the year.

While higher energy costs are inflationary and make near-term rate cuts look less probable, it also puts more pressure on consumer finances and can ultimately be demand destructive. This can push core inflation pressures lower over the medium to longer term. Therefore, we argue the story is one where rate cuts are delayed rather than removed from forecasts. We have pushed our Fed rate cut forecasts from June and September to September and December.

This chart supports ING’s view on wages. The ECI-wages is a more accurate measure of wage trends. It was +3.4% YoY in Q4’25 and on a downtrend.

Aggregate payrolls (employment x hours x wages) from the BLS data are up 4.4% YoY in February, roughly in line with the past year, but it all comes from wages per BLS inflated numbers.

Normalizing job growth to 50k per month and reducing wage growth to 3.0%, aggregate payrolls would be rising 3.5% YoY, well below 1.0% in real terms, vs +1.5% in 2025.

I had warned on February 16 that January’s +130k job growth was artificially high (birth-death model, seasonal adjustments). It was only revised down 4k but note that December was initially revised down 2k before Friday’s –65k cut.

At best, the US labor market is at stall speed. The unemployment rate rose from 4.3% to 4.44% but, absent the decline in the participation rate, unemployment would be closer to 5%.

As KKR notes, “despite reshoring and Fed cuts, the Goods sector remains in a recession. All told, Goods jobs were -25,000. Every sector was negative: Mining/Logging, Construction, Durable Goods, and Non-Durable Goods”

Trump’s Achille’s heel is also the economy’s. With only wages fueling income growth, slowing to around 3.0-3.5%, and inflation potentially pushing above 3.0%, growth in real spending power is close to zero.

Add a weak stock market and the top tier will suddenly merge with the majority of Americans already hurting.

Retail Sales Start Year on Decent Note, February Looks Weaker

(…) While overall retail sales slid 0.2% during the month, when you strip out some of the more volatile components the control group measure of sales rose 0.4% with some modest upward revisions to the prior months of data. This suggests goods consumption started the year on a good note given this component tracks more closely with overall goods spending, as the excluded components (autos, gas, building materials & restaurants) are included elsewhere within GDP or through other source data.

One big note of caution though is that these data are even more backward looking than usual as the government continues to catch up on data releases following the historic shutdown last Fall. Retail spending in February looks a bit weaker. High-frequency data on credit card spending from Bloomberg show a weaker average year-ago pace of spending registered in February as historic winter weather across the Northeast and other parts of the country likely dented consumption.

As far as January is concerned, most of the weakness in headline sales can be traced to sales at auto dealers and gasoline stations. Vehicle unit sales slipped to their lowest pace since late 2022 in January. Meanwhile the drop in gasoline sales reflects a decline in retail gasoline prices specifically with the average daily price at the pump down about six-cents/gallon from December.

Source: U.S. Department of Commerce and Wells Fargo Economics

This weakness was somewhat offset by a pop in sales at building material stores, which was also likely at least partially price related, as the consumer price index for tools, hardware & outdoor equipment has been strong in recent months. Restaurant sales slipped 0.2% in January, which isn’t an encouraging sign for broader services spending, but isn’t overly worrying either, as high-frequency credit card data suggest some stabilization in restaurant spend after a drop-off toward year-end.

That said, we’re not looking for much improvement in broad retail come February. Incoming data suggest some softness in activity, including: poor weather, subdued credit card spending, and weak orders activity reported by retail purchasing managers. Leisure & hospitality employment also slipped materially during the month, though there was some stabilization in travel-related measures of data like hotel occupancy and TSA throughput.

With tax refunds running ahead of last year’s averages, we should start to see more cash flow materially support spending come March. One big caveat here is how the conflict in Iran evolves and its impact on domestic retail gasoline prices.

Consumers are fairly sensitive to gas prices and the average price of a gallon of gasoline is already up by twenty-five cents in the first week of March compared to the average registered in February on the national level. Higher prices will boost these nominal retail figures, but would translate to lower real, or inflation-adjusted consumption. More cash flow stemming from higher average refunds is a factor we expect to offset spending weakness this year, but higher prices at the pump may dent confidence or sap up some of those funds.

Source: U.S. Department of Commerce and Wells Fargo Economics

A less positive spin would point out that total retail sales were flat in both December and January and only up 0.2% for Control Sales. Goods inflation was up 0.1% leaving real sales roughly unchanged in December/January.

EARNINGS WATCH

From LSEG IBES:

491 companies in the S&P 500 Index have reported earnings for Q4 2025. Of these companies, 72.7% reported earnings above analyst expectations and 22.4% reported earnings below analyst expectations. In a typical quarter (since 1994), 67% of companies beat estimates and 20% miss estimates. Over the past four quarters, 78% of companies beat the estimates and 16% missed estimates.

In aggregate, companies are reporting earnings that are 4.8% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.4% and the average surprise factor over the prior four quarters of 7.6%.

Of these companies, 72.6% reported revenue above analyst expectations and 27.4% reported revenue below analyst expectations. In a typical quarter (since 2002), 63% of companies beat estimates and 37% miss estimates. Over the past four quarters, 71% of companies beat the estimates and 29% missed estimates.

In aggregate, companies are reporting revenues that are 2.0% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 1.7%.

The estimated earnings growth rate for the S&P 500 for 25Q4 is 14.1%. If the energy sector is excluded, the growth rate improves to 14.6%.

The estimated revenue growth rate for the S&P 500 for 25Q4 is 9.2%. If the energy sector is excluded, the growth rate improves to 10%.

The estimated earnings growth rate for the S&P 500 for 26Q1 is 12.8%. If the energy sector is excluded, the growth rate improves to 13.8%.

Trailing EPS are now $275.67. Full year 2026e: $316.69. Forward EPS: $315.89e. Full year 2027e: $367.81.

Amazingly, S&P 500 revenues rose 9.2% in Q4’25, beating an already strong forecast of 7.3%. All sectors beat!

Earnings estimates keep rising:

Encouraged by corporates:

Although things may be changing as we speak…

Based on today’s pre-opening of 6650, the forward P/E is 21.0.

The 200-d moving average is at 6582.

Oil, AI, and S&P 500 earnings

From Goldman Sachs:

Following the launch of military operations in the Middle East over the weekend, the S&P 500 has sold off by 2%. The historical impact of geopolitical risk shocks on equity prices has typically been short lived. During seven spikes in the Geopolitical Risk Index since 1950, the S&P 500 fell by an average of 4% during the first week. On average equities rebounded to their levels prior to these shocks within the subsequent month, but the range of historical outcomes has been wide.

The direct impact of modestly higher oil prices on GDP growth and inflation should be limited. Brent crude oil jumped by 27% this week to $93 per barrel. Our economists’ rule of thumb is that a sustained $10/barrel increase in oil would reduce 2026 GDP growth by about 10 bp and boost core CPI by less than 5 bp.

Likewise, the net effect of higher oil prices on S&P 500 EPS should be roughly neutral, but with variation across industries. Higher oil prices directly benefit the earnings of Energy firms, but are a headwind for industries that rely on oil as an input, such as airlines, and industries exposed to consumer spending. These fundamental relationships are consistent with industry rotations during historical oil price spikes.

For US equities, the bigger risk is a sustained period of severe oil disruption that weighs on economic growth. Every 1 pp change in real US GDP growth corresponds to a 3-4% change in S&P 500 EPS in our top-down model.

In addition to the trajectory of oil, S&P 500 earnings will depend on the trajectory of AI investment and monetization. The Energy sector’s share of S&P 500 earnings has declined to 4% today from 15% 20 years ago and almost 30% in 1980. Even combined with the earnings weights of the oil-sensitive Consumer Discretionary (8%) and Consumer Staples (5%) sectors, the group accounts for less than half the collective S&P 500 earnings contribution from Information Technology (25%) and Communication Services (13%). (…)

Consensus estimates suggest NVDA alone will account for 24% of S&P 500 EPS growth in 2026. During the last few months, hyperscaler capex guidance and the earnings outlooks for chip and memory stocks have both surged higher. For the group of seven stocks, GS equity analysts have raised their collective 2026 EPS growth forecast by 9 pp to +41%, with increased earnings for the chip companies more than offsetting headwinds to hyperscaler earnings from increased depreciation.

We estimate that AI investment and AI cloud services accounted for about 25% of S&P 500 EPS growth in 2025 and will account for roughly 40% of EPS growth in 2026. This boost should decline to approximately 25% in 2027.