Fed, big earnings week loom for markets as global tensions muddy outlook

By Lewis Krauskopf

NEW YORK, Jan 23 (Reuters) – Investors who have been consumed by geopolitical turmoil to start the year may switch focus in the coming week to prospects for artificial intelligence-related profits and the path for interest rates, with a huge crop of earnings reports and a Federal Reserve meeting on tap.

U.S. stocks hit a rocky patch this week due to fallout from President Donald Trump’s aggressive stance to acquire Greenland, which threatened a new trade war with Europe.

Markets initially reeled, with stocks, bond prices and the U.S. dollar all swooning, an unusual occurrence. But major equity indexes rebounded later in the week after Trump backed off tariff threats, suggesting a deal was in sight for Greenland.

“It’s been a little bit of a short but steep roller-coaster ride over the past several days,” said Yung-Yu Ma, chief investment strategist at PNC Financial Services Group. “I don’t know that it’s completely behind us, but at least the acute phase seems to be behind us.”

INVESTORS SEEK INSIGHT ON AI BENEFITS TO PROFITS

The upcoming reporting week could turn attention to the outlook for U.S. corporate profits, with earnings overall expected to rise substantially this year including gains from a wider group of companies.

About one-fifth of the S&P 500 is due to report quarterly results, including Apple, Microsoft, Meta Platforms and Tesla, four of the “Magnificent 7” megacap companies.

Coming off the third straight year of double-digit returns for the S&P 500, the benchmark index is up about 1% to start 2026. The index’s valuation is also above 22 times expected earnings for S&P 500 companies, well higher than its long-term average of 15.9, so “the earnings bar had better be met,” said Chris Galipeau, senior market strategist at Franklin Templeton.

“We can get sidetracked by the economic data, we can get sidetracked by geopolitics like Greenland, but at the end of the day, earnings are the driver,” Galipeau said.

With 59 companies having reported results as of Thursday, 81% have beaten analysts’ earnings estimates. S&P 500 earnings are now expected to have climbed 9.1% in the fourth quarter of last year from a year earlier, according to Tajinder Dhillon, head of earnings research at LSEG. In 2026, S&P 500 earnings are expected to climb more than 15%.

A critical theme this earnings season is whether companies are starting to reap benefits from AI-related  investments. Doubts that massive spending on data centers and other infrastructure would yield returns weighed on tech and other AI-related stocks late in 2025, after that group had been a key driver for the bull market in U.S. stocks that is entering its fourth year.

“It’s important just to hear from the major companies in the S&P 500 that they are continuing to push these uses and initiatives forward for AI so that people believe that it is not just a story of building and infrastructure,” said PNC’s Ma.

FED RATE OUTLOOK, INDEPENDENCE IN FOCUS

Investors widely expect the Fed to hold rates steady when it gives its monetary policy decision on Wednesday at the end of its two-day meeting. After the U.S. central bank lowered rates by a quarter percentage point at each of its last three meetings of 2025, Fed Funds futures are pricing in at least one more such cut this year, according to LSEG data.

“We expect the Federal Open Market Committee to take an extended pause because the fed funds rate is close to neutral, downside risks to the labor market have begun to ease, and inflation has peaked,” Michael Pearce, chief U.S. economist at Oxford Economics, said in a note. 

The near-term rate outlook could take a back seat to issues around the Fed’s political independence. The meeting follows the revelation this month that Fed Chair Jerome Powell faced legal threats from the Trump administration, which Powell called a “pretext” to gain the dramatic rate cuts Trump wants.

Meanwhile, Trump is mulling his decision on a nominee to replace Powell, whose term as chair ends in May. A decision could come soon.

Investors will remain on guard for geopolitical wildcards or other policy proposals from the administration.

“If the Greenland situation, for example … were to go off the rails, and then we’ve got the tariff threat and all that sort of thing, that would certainly dent confidence and probably put the tape under pressure,” Galipeau said.

(Reporting by Lewis Krauskopf; Editing by David Gregorio)