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Photo: Eduardo Munoz Alvarez/Getty Images

Stocks jumped on Monday as investors bought optimism that a U.S.-China trade deal could be salvaged, despite a lack of tangible evidence that progress is being made.

The state of play: The market will need the animal spirits of trade-war hope, because many of the fundamental catalysts that have buoyed stock prices in years past are starting to unravel.

By the numbers: S&P 500 companies are headed for an "earnings recession" to start the year, with earnings down 1.4% and 1.3% year-over-year in the first and second quarters of 2019, respectively, data from Morgan Stanley shows.

  • Profits, even at small and private companies, are turning negative, according to data from the Commerce Department's national income and product accounts.
  • Total U.S. corporate profits have fallen by close to 10% since the third quarter of 2018.

Why it matters: "Every time these profits have contracted in the past, the next 12 months’ job growth has been negative," Lisa Shalett, CIO of Morgan Stanley Wealth Management, said in a note to clients Monday. She is expecting the S&P 500 to drop to around 2700, thanks to the continued erosion of earnings and profit.

  • "As was the case in 1999, when S&P 500 profits diverged from the broader profit measure, the outlook for stocks is not positive," she says.

Investors are undervaluing the negative impact of the earnings recession, Morgan Stanley's chief U.S. equity strategist Mike Wilson warns.

  • Stocks were able to power through the last earnings recession in 2016, but there isn’t enough economic growth to get out the hole this time, he says, noting declining jobs growth and the ongoing U.S. transportation recession.

But wait, there's more. Companies are slowing the pace of stock buybacks this year, withdrawing a major buyer from the equity market as both institutional and retail investors have been net sellers of equities all year.

  • The stock market also will have to make up for the muted performance of the FAANG stocks, as shares of Facebook, Amazon, Apple, Netflix and Google parent Alphabet have provided limited upside over the past year, WSJ notes.
  • "All the stocks, with the exception of Alphabet, peaked last year and remain well below their records after a brutal selloff last fall wiped out billions of dollars in market value. The stocks have shed nearly $415 billion since August 2018 when their combined market value swelled to $3.7 trillion," writes WSJ's Michael Wursthorn.
  • FAANG stocks account for around 20% of the S&P 500's value.

Go deeper

2 hours ago - Health

Pfizer says COVID vaccine over 90% effective in kids

A health care worker preparing a Pfizer-BioNTech coronavirus vaccine dose in New York City on Oct. 21. Photo: Michael M. Santiago/Getty Images

Pfizer and BioNTech said their COVID-19 vaccine was more than 90% effective at protecting children between the ages of 5 and 11 from symptomatic infections from the virus, according to a study posted online by the Food and Drug Administration Friday.

Why it matters: Pfizer is seeking an emergency use authorization to vaccinate children — one of the last groups of Americans still largely ineligible to receive a coronavirus vaccine.

Changing the inflation conversation

Illustration: Annelise Capossela/Axios

Inflation looks like it’ll run hot for longer than plenty of smart people thought it would. The conversation over just how much more Americans will have to pay for their stuff has taken on a new intensity, as supply problems show few signs of fading.

Why it matters: The rate of price growth has remained consistently strong in recent months — a time that some thought would bring cooling prices after an initial reopening spike. What goes on with prices will influence the decisions made by Congress, the Biden Administration, and the Federal Reserve.

The biggest headline from Biden's town hall

President Biden greets attendees during a commercial break in Baltimore last night. Photo: Nicholas Kamm/AFP via Getty Images

What matters from President Biden's town hall with CNN's Anderson Cooper at Baltimore Center Stage on Thursday:

The biggest headline: Biden is jettisoning the corporate tax increases that White House officials have insisted, for the past 10 months, are wildly popular across the country. He admitted he doesn't have the votes.