5 Things Investors Must Be Aware of as the Market Heads Into Critical Q2 Earnings Season

The stock market is about to face a real test, as investors evaluate how economic fundamentals are evolving with Trump’s inconsistent tariffs coming into play during the Q2 earnings season. Despite resilient economic data so far, the outlook could shift dramatically amid rising geopolitical tensions. This week, JPMorgan will kick off the banking sector’s earnings, while tech heavyweights like TSMC and Netflix are also set to report. Here are five key things investors need to be aware of before the results come in.

1. S&P 500 and Nasdaq 100 at Record Highs, but Sentiment Remains Cautious

Ahead of Q1 earnings, stocks tried to rebound from a broad selloff driven by Trump’s reciprocal tariffs and escalating U.S.-China trade tensions. Solid earnings then helped extend the recovery. Now, both the S&P 500 and Nasdaq 100 are hovering near record highs, despite Trump sending dozens of tariff warning letters last week to Japan and South Korea, while also threatening steep hikes for the EU, Canada, and Mexico.

Yet the market’s reaction remains muted, as many investors view these threats as part of Trump’s negotiation playbook. There’s a belief he may "TACO" again—tough talk followed by a sudden deal—to support markets.

So is the broader market overheating? The answer isn’t clear-cut. Take the S&P 500: it has stayed above the 6200 support level, but remains capped at 6300 for the past two weeks. Meanwhile, the RSI has eased to 66, down from an overbought 88, reflecting a tempering of enthusiasm rather than extreme caution. This signals that investors are cautious heading into earnings, needing a fresh catalyst to drive another leg up.

During Q2, Trump’s mild 10% baseline tariff on imports (with additional pressure on Chinese goods) has yet to cause major disruptions. Many companies have likely managed the impact through inventory adjustments. Combined with robust macro data and a surprisingly strong June nonfarm payroll report, the market’s Q2 performance could still hold up. Investors may not need to worry—at least not yet.

2. Don’t Expect Huge Earnings Surprises: Inflation Risks Are Building

Despite market strength, investors should dial back expectations for major earnings beats. Tariff impacts and inflation pressures are beginning to materialize.

Consider Walmart and Nike. So far, they’ve avoided raising prices due to high inventory levels and a temporary tariff buffer. But this may change. Q3 earnings could reflect more serious cost pressures, and forward guidance this quarter may sound more cautious.

Fed Chair Jerome Powell has long warned that tariffs could significantly boost inflation. So far, consumer prices haven’t shown a dramatic surge—but that could change soon. Tuesday’s CPI report will be crucial. If inflation remains subdued, markets may resume betting on rate cuts. But if it comes in hotter than expected, Powell’s concerns might prove warranted.

At the same time, some worry tariffs could weigh on banks. JPMorgan CEO Jamie Dimon has voiced concerns about deteriorating economic conditions. Still, investors don’t always take his warnings at face value—especially as banks continue to benefit from deregulation and solid earnings. JPM, BAC, and MS have all pulled back from recent highs, and sentiment toward the sector remains neutral. If their stocks open lower on cautious guidance, dip-buyers may step in, betting on long-term resilience.

3. AI Drove the Rally—But TSMC May Signal Chip Demand Is Slowing

The stunning V-shaped market recovery and new highs have largely been driven by AI hype. Nvidia just crossed the $4 trillion market cap mark. Semiconductors have soared, and tech titans like Microsoft, Meta, and Oracle rallied on AI optimism.

However, concerns are growing that uncertainty around tariffs may have pushed tech firms to over-order chips—especially since most AI chips are manufactured in Taiwan. TSMC will report earnings Thursday before the bell. According to released figures, its April–June revenue reached NT$933.8 billion, up 39% year-over-year. But June’s standalone revenue was NT$263.7 billion—a 17% drop month-over-month and up 27% from last year. That hints at a slowdown in momentum.

While the company posted strong growth of 42% and 39% Y/Y for the first two quarters, full-year revenue is now expected to grow only in the mid-20% range. This indicates the second half may face more significant challenges, as concerns over potential oversupply of AI chips among tech giants begin to surface.

Investors should closely watch TSMC’s forward guidance: how tariffs may cloud future orders, and whether robust first-half results can be sustained. The implications are significant—not just for TSMC, but for chip stocks and broader tech names. Nvidia’s $4 trillion valuation could carry correction risk if AI momentum fades.

4. Limited Market Breadth and Growing Divergence

While the S&P 500 and Nasdaq have hit new highs, the Dow Jones Industrial Average remains below its February peak. That’s not surprising—the Dow is more manufacturing-oriented and price-weighted, making it more sensitive to Trump’s tariff threats.

Even within the market-cap-weighted indices, performance is uneven. Among the Big Seven, Nvidia, Microsoft, and Meta have reached record highs, while Apple, Amazon, Google, and Tesla are still far off their peaks. The current rally is largely AI-driven rather than broad-based.

Two potential outcomes are emerging. In one, manufacturing-heavy names suffer from tariffs while AI hype fades, leading to a pullback as leadership evaporates. In the other, tech continues to shrug off trade risks, and the AI boom lifts markets further. With clear divergence, investors must choose a side—either the rotation broadens or the rally narrows and cracks.

5. Speculative Boom Builds, but Valuations Are Stretched

Trump’s comments on nuclear energy and crypto have ignited a frenzy in small-cap stocks. Bitcoin has hit new records, while crypto-linked names like Circle and Robinhood are up 504% and 164% respectively. Investors are betting that crypto is the future, potentially disrupting legacy systems like Visa and Mastercard.

But much of this rally appears speculative. Sky-high valuations aren’t supported by fundamentals yet. Whether this is another human-fueled bubble or a genuine innovation wave remains unclear. Even if crypto dominance is here to stay, whether current high-fliers will be long-term winners still needs to be validated.

To conclude, this Q2 earnings season carries more weight than usual. It will answer the big questions—how investors are positioning, how tariffs are impacting company fundamentals, and whether AI momentum can last. The backdrop is made even more complex by a weakening U.S. dollar.

Investors should remain cautious and alert to how the narrative evolves—but be prepared. A big move could be just around the corner.