S&P 500 Faces 2.6% EPS Growth Slowdown Amid Trade War Uncertainty

U.S. stocks, which have recently reached an all-time high, are now facing a critical test of their earnings performance. Goldman Sachs has issued a warning that the earnings per share (EPS) growth rate for the S&P 500 index is expected to be the lowest in two years. This warning comes as the impact of the trade war initiated by the Trump administration continues to unfold, making the upcoming second-quarter earnings season a crucial period for assessing the profitability of U.S. companies.

Analysts predict that the year-over-year EPS growth for the second quarter, spanning April to June, will be a mere 2.6%. This significant slowdown in earnings growth is a stark contrast to the robust performance that has driven the market to its recent highs. The deceleration in earnings growth is largely attributed to the ongoing trade tensions, which have created uncertainty and disrupted supply chains for many companies.

The divergence in performance across different sectors highlights the varying abilities of industries to navigate the challenges posed by the trade war. For instance, food giant General Mills has seen its stock price plummet by 5% due to cost pressures from tariffs, while athletic brand Nike has managed to mitigate the impact of tariffs through supply chain optimizations, resulting in a 15% stock price increase. This disparity underscores the importance of the upcoming earnings reports, as investors will be closely monitoring how companies across various sectors are faring in the current economic environment.

From a macroeconomic perspective, the earnings growth rate for S&P 500 constituents is expected to slow significantly in the second quarter. This forecast stands in sharp contrast to the double-digit growth rates seen at the beginning of the year. Market analysts attribute this slowdown to the unprecedented trade disputes, which are impacting corporate profits through increased costs and suppressed demand. Despite a 19% drop in the S&P 500 from its peak in April, the index has since recovered to near its historical highs, driven by factors such as the global AI investment boom, signs of economic recovery in the U.S., and optimistic expectations of interest rate cuts by the Federal Reserve. However, the fundamental strength of corporate earnings may limit the index's potential for further gains.

It is noteworthy that market participants may have differing views on the impact of trade frictions. Goldman Sachs' report highlights that while some of the tariff effects have been priced into market expectations, the specific transmission speeds and absorption capacities across different industries remain to be validated during the earnings season. This uncertainty has led institutional investors to exercise caution, particularly with high-valued technology giants, and has prompted some funds to shift towards sectors with strong cost-passing capabilities, such as consumer staples, and industries with robust global supply chains, such as manufacturing.