Earnings season expected to drive markets higher, plus signs the bull market is broadening

Key Concepts

• MAG 7: The seven largest publicly traded companies in the US (Meta, Apple, Nvidia, Google/Alphabet, Amazon, Microsoft, and Tesla) driving significant market gains.
• Relative Strength: A technical analysis tool comparing the performance of different markets or asset classes.
• Cyclical Plays: Investments in sectors that perform well during economic expansions (e.g., industrials, retail, banks).
• Capex Incentives: Tax incentives designed to encourage capital expenditures by corporations.
• Breadth Scoreboard: A metric used to assess whether market gains are broad-based or concentrated in a few stocks.
• Inventory Build: An increase in the amount of goods retailers have in stock.
• Pantry Loading: Consumers stocking up on non-perishable goods.
• Irresistible Superiority: P&G’s framework for product development, focusing on delivering superior performance and value to consumers.

Earnings Season & Market Broadening

Earnings season is currently a primary driver of market activity, with analysts initially estimating 8.2% earnings growth for the S&P 500 in the fourth quarter, potentially rising to over 14% upon full reporting. Richard Sapperstein (Treasury Partners) highlighted a positive fundamental backdrop, citing “declining inflation, a robust economy, and excellent jobs” as supportive of earnings growth. There's a growing expectation of market gains expanding beyond the “MAG 7” stocks, with BNY Wealth anticipating increased participation from other sectors like materials, industrials, and energy. This broadening is seen as a positive sign, indicating a more sustainable rally. The incentives from the “big beautiful bill” are also expected to lower corporate tax rates by approximately 3%, further boosting bottom lines.

The MAG 7 & Market Breadth – A Deep Dive

The market has been largely driven by the “MAG 7” stocks, particularly in the last few years, fueled by the development of AI capabilities. However, the question is whether this rally will remain concentrated in these mega-caps or broaden to include other companies. Jared Booker (Y Fin) utilized the concept of relative strength to analyze this. He compared the market-cap weighted S&P 500 (where larger stocks have more influence) to an equal-weighted version (where each stock has the same influence).

• Relative Strength Calculation: Price of one market divided by the price of another, tracking the trend over time. An upward trend indicates outperformance of the first market, a downward trend indicates outperformance of the second, and a sideways trend indicates equal performance.
• Historical Analysis: The chart dating back to 1990 shows periods of concentration (like the dot-com boom) and broader participation (leading up to 2010). The recent trend, however, has been upward, confirming the MAG 7’s dominance.
• The Shift: Horizon’s Scott Ladner explained that the initial phase of AI development was concentrated in a few companies. However, the next phase involves diffusing AI throughout the economy, allowing more companies to benefit from productivity enhancements. Ladner stated, “The past couple three years have been all about the building of of AI capabilities…But these next couple years are going to be about diffusing AI throughout the entire economy.”
• The Bench Needs to Contribute: The key isn’t necessarily a decline in the performance of the MAG 7, but rather the “bench” (other stocks) contributing to the rally. Ladner emphasized, “I’m certainly not calling for Nvidia or Mac 7…to go down. All they have to do is just sort of tread water or the other ones outperform.”
• Cyclical Plays in 2026: Ladner recommends focusing on cyclical plays – industries that benefit from economic growth – such as industrials, retail, and banks.

Natural Gas Price Surge

A major winter storm expected to hit the East Coast is causing a significant spike in natural gas prices. Prices on the futures market jumped 75% over the last five days (the largest 5-day jump in 30 years), currently settling at a 55% increase. Companies like EQT and Tero are also seeing stock increases. Jake Connley explained that natural gas is the primary heating fuel and a significant source of electricity in the US. The limited pipeline infrastructure creates capacity constraints, exacerbating price increases during periods of high demand. Data centers also contribute to the demand. The combination of increased residential heating demand, industrial demand, and trader speculation is driving the price surge.

Stock Specific Movements

• Capital One: Shares are under pressure following Q4 earnings that missed Wall Street expectations, despite announcing a $5.1 billion acquisition of Brex.
• Alcoa: Shares are up due to better-than-expected Q4 results, benefiting from rising aluminum costs and tariffs (currently at 50% due to Trump’s trade policies).
• Proctor & Gamble (P&G): P&G reported better-than-expected results, with growth outside the US at 3% overall (8% in Latin America, 3% in China, 3% in Europe, and 2% in Asia, Middle East, and Africa). The US market was impacted by a significant inventory build in the base year due to port strikes and a hurricane, leading to weaker shipments. However, P&G’s CFO expressed confidence in future growth, citing successful innovation and commercial plans.

P&G’s Consumer Strategy & Outlook

P&G’s CFO emphasized the importance of “irresistible superiority” – delivering superior product performance and value to consumers. He noted that consumers are diligent judges of value, considering performance, packaging, communication, and price. P&G offers a range of products at different price points to cater to various consumer needs. The company maintains its full-year guidance, expecting continued growth outside the US and a return to 3-4% category growth in the US. Regarding tariffs, P&G treats them like other cost factors (commodities, foreign exchange) and mitigates their impact through productivity improvements, sourcing changes, innovation, and pricing. The CFO acknowledged the positive headlines regarding the US economy but noted that P&G’s category growth is currently slower (1-2% in the US) but expects it to return to 3-4% over time. He also stated that P&G doesn’t speculate on potential tariffs, instead focusing on a consistent playbook of cost management and value creation.

Conclusion

The market is currently navigating a complex landscape of earnings season, geopolitical tensions, and evolving economic conditions. While the MAG 7 continue to be significant drivers, there's a growing expectation of market broadening, with cyclical sectors poised to benefit. The upcoming winter storm is driving up natural gas prices due to increased demand and limited infrastructure. Companies like P&G are focused on delivering value to consumers and navigating cost pressures through innovation and efficiency. Monitoring relative strength and breadth scoreboards will be crucial for investors seeking to identify opportunities in a potentially evolving market dynamic.