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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

AP: Justice Dept. rescinds "zero tolerance" policy

A young girl waves to onlookers through the fence at the US-Mexico border wall at Friendship Park in San Ysidro, California in Nov. 2018. Photo: Sandy Huffaker/AFP via Getty Images

President Biden's acting Attorney General Monty Wilkinson issued a memo on Tuesday to revoke the Trump administration's "zero tolerance" immigration policy, which separated thousands of migrant children from their families at the U.S.-Mexico border, AP first reported.

Driving the news: A recent report by Justice Department Inspector General Michael Horowitz emphasized the internal chaos at the agency over the implementation of the policy, which resulted in 545 parents separated from their children as of October 2020.

Biden picks up his pen to change the tone on racial equity

Vice President Harris looks on as President Biden signs executives orders related to his racial equity agenda. Photo: Doug Mills-Pool/Getty Images

President Biden is making a down payment on racial equity in a series of executive orders dealing with everything from private prisons to housing discrimination, treatment of Asian Americans and relations with indigenous tribes.

The big picture: Police reform and voting rights legislation will take time to pass in Congress. But with the stroke of his pen, one week into the job Biden is taking steps within his power as he seeks to change the tone on racial justice from former President Trump.

Most Senate Republicans join Rand Paul effort to dismiss Trump's 2nd impeachment trial

Photo: Joshua Roberts-Pool/Getty Images

Forty-five Senate Republicans, including Minority Leader Mitch McConnell, supported an effort to dismiss former President Trump's second impeachment trial.

Why it matters: The vote serves as a precursor to how senators will approach next month's impeachment trial, making it highly unlikely the Senate will vote to convict. The House impeached Trump for a second time for "incitement of insurrection" following events from Jan 6. when a pro-Trump mob stormed the Capitol.