I’d venture a guess that most Kansas City (KC) fans expected their team to three-peat, while most Philadelphia fans fully expected Jalen Hurts and Nick Siriani to engineer an upset of the back-to-back champs. It’s probably just as safe to assume that few fans in either camp expected a one-sided blowout like the  one we suffered on Sunday. (Whether the halftime show, or the commercials lived up to the hype is far too subjective to explore here, but I know at least a few people in my inner circle were disappointed that the ads weren’t more fun to watch...)

Regardless, as the Big Game showed us once again, expectations loom large in our final evaluation of anything of consequence that happens to us — we hold the actual result up against our ex-ante expectations and allow the difference to color our emotions: If KC fans expected Philly’s defense keep Patrick Mahomes locked down all game, they probably weren’t quite as disappointed when it actually happened. But if they instead believed that Mahomes and his offense would rise to the Eagle’s challenge, it (H)urt(s) even more when reality strikes. Even more because the result was so unexpectedly one-sided.

For markets, the brutal calculus of expectations-versus-reality arguably matters even more than it does for football fans. For example, there were several legitimate candidates vying for the title of chief attention-getter last week, but the undisputed favorite coming into the week was Friday’s non-farm payrolls report. That’s usually the case, because the Bureau of Labor Statistics’ monthly tally of how many jobs were lost or created by the U.S. economy is routinely the most-anticipated economic release among the dozens or so we get each month. But when Friday’s count came in pretty close to where economists expected it would, the non-farm payrolls release became kind of a non-event and attention quickly shifted elsewhere.

For the record, the U.S. created 143,000 new jobs last month, a short, three-yard toss away from the 175,000 or so from where economists expected it to land (if anything, the difference between expectations and reality was actually on the happy side, with the slightly slower-than-expected pace of job creation taking a little heat out of the inflation hot-box while keeping the Fed on watch for a deeper decline).¹ You could probably say the same about Tuesday’s JOLTS report, which saw the number of job openings decline to a smaller-than-expected 7.6 million and the quits rate hold steady at 2%, and ADP’s pay insights report, which confirmed that wage growth has fully recovered from its febrile bout with COVID and is now more or less back to normal.^2,3

All these data are consistent with a comfortable, non-inflationary softening of the labor market that markets hoped for and largely expected, and more or less all of last week’s job-related numbers were close enough to where analysts and economists guessed they might end up so as to make them reasonably easy to ignore. So, what then, was responsible for driving sentiment at least slightly lower last week? In a word, expectations.

This is where it gets a little confusing, so stick with me: hiding in the shadows of last Friday’s non-farm payrolls report was an update of the University of Michigan’s consumer sentiment report – always an interesting release, but also one that under ordinary circumstances is far less likely to grab that market’s attention than payrolls data, especially when both releases occur on the same day.

But unlike last week’s litany of mostly as-expected labor data, the UofM’s consumer sentiment data missed economists’ expectations by a wide margin.⁴ It turns out that the US consumer is increasingly worried about not only jobs — which we already knew — but also significantly more concerned that prices will re-accelerate as tariff talk continues (which we might have suspected, but didn’t really know for sure...) That drove the headline sentiment figure significantly lower while pushing consumers’ near-term inflation expectations significantly higher. That in turn corresponded to a drop in U.S. stocks on Friday that erased modest gains that had accompanied the payrolls release roughly an hour and a half earlier. That stands as evidence that it was worse-than-expected consumer sentiment data that kept markets from performing better than they otherwise might have on the heels of what was initially seen as reasonably favorable jobs data.

If true, that gives us important insight into the current state of play for both markets and the economy: for now, the dominant money-line bet that markets seem to be making is that the Trump Administration is using tariffs as a negotiating tactic rather than durable economic policy — that is, the White House is using the threat of trade restrictions to extract concessions from our trading partners like Canada, Mexico and China, but with little intention of keeping them in place for the long-term. Consumers, on the other hand, seemed to take the ‘over’ on that bet, expecting — or at least fearing — a more durable impact that could eventually push the prices they pay for things like cars, washing machines and sofas significantly higher and dent economic prospects in the process. Notably, the UofM data showed similar results across the political spectrum, neutering the argument that partisanship is responsible for the change-of-heart.

This sets up another potential mismatch between expectations and reality that we all get to watch in real-time: eventually, markets will either be vindicated (and consumers pleasantly surprised) when all the tariff-talk isn’t as inflationary as it might have seemed, or consumers will be proven correct (and markets disappointed) when there proves to be more bite than bark behind the President’s trade policy. It’s not quite Chiefs-versus-Eagles-level drama, but it should at least be more interesting to watch than the one-sided affair that polluted our screens on Sunday. 

Moving on...Another area where expectations matter as much (or more) than reality is corporate earnings. Last week’s most-anticipated results came from card-carrying Mag7 members Alphabet/Google and Amazon, both of which were able to beat bottom-line analyst expectations – the minimum standard for an executive team that hopes to avoid post-earnings volatility in their stock – but with a few caveats tossed in. For Alphabet, the big “yeah, but...” inside last week’s release was lower-than-expected revenue at the company’s ‘cloud’ unit – the division with perhaps the most obvious (and immediate) link to AI. Amazon, too, suggested its cloud unit faces constraints, which very likely contributed to a lower-than-expected sales forecast for calendar year 2025 that pressured its stock alongside Alphabet’s.

On the plus side, both companies also guided forecasts of the amount they expect to spend building out their AI capabilities this year significantly higher (Alphabet to roughly $75 billion and Amazon to around $100 billion.) Analysts and investors will undoubtedly debate the wisdom of such aggressive capital spending budgets at the individual company level, but from a broader perspective, this represents an upping-of-the-ante for AI spending where some analysts had feared a fold.

And that sets up another expectations-versus-reality drama that will unfold in living color in front of us all: Will AI’s hopes and dreams be fulfilled (leading, perhaps, to a three-peat for large cap U.S. stocks in calendar year 2025?) Or will AI fall short, like Patrick Mahomes and Andy Reid’s Chiefs as they sought an historic three-peat of their own? Stay tuned to find out.

What to watch this week

It should be a relatively quiet week on the macro front, with two inflation-related releases – consumer prices (CPI) on Wednesday and producer prices (PPI) on Thursday – dominating the narrative. With consumers now openly worried about prices (see the UofM discussion above,) economists and analysts will be poring over both releases for any hint of an acceleration in prices that might further dissuade the Federal Reserve (The Fed) from continuing its rate-cutting campaign or otherwise upset the economy.

It’s of course too early to see any tangible impact of tariffs inside reported inflation data, especially because Canada and Mexico were granted a month-long reprieve almost as soon as the headline-grabbing duties were announced. But sometimes the mere threat of inflation can make price growth a self-fulfilling prophecy, particularly if consumers rush to buy goods before they become more expensive. Indeed, there has been at least some anecdotal evidence of demand ‘pull-forward’ inside business- and consumer-related surveys for a month or two running. That makes Friday’s retail sales release a must-read for anyone worried that inflation-stoking panic-buying may have already crept into consumer behavior.

Meanwhile, it’s obvious that November’s election unleashed a fresh wave of optimism among business leaders. Among the first business-related survey to respond was the small business sentiment survey conducted by the National Federation of Independent Businesses, who’s membership is hopeful that less regulation and a more business-friendly environment may improve future prospects. But with the post-election honeymoon period rapidly drawing to a close, sentiment may soon reach a crossroads. Watch Tuesday’s monthly update of the National Federation of Independent Businesses (NFIB) small business survey for hints about which way the tide may break.

Finally, fourth-quarter earnings season will gather more momentum this week. This week’s highlights include a number of consumer-related companies that could give additional insight into spending trends (McDonald’s on Monday and Coca-Cola on Tuesday), as well as a handful of semiconductor-related firms (ON Semiconductor on Monday and Applied Materials on Thursday) and the perspective they can offer into the AI-fueled capital spending boom. While it’s still early innings, results so far have been acceptably strong, even if forward guidance has been mixed. With the emphasis now shifting away from headline-grabbing names and toward the rank-and-file, earnings season is about to become a numbers game as much as a catalog of interesting anecdotes.