Earnings Resilience Amid US-China Trade Turbulence

The Sino-American trade and technology rivalry has reached a stalemate, with tariff threats and retaliatory measures dominating headlines. Yet, for investors, the market’s focus remains firmly on corporate earnings. As Q1 2025 results pour in, the resilience of certain sectors—and the fragility of others—offers critical insights into navigating this geopolitical storm.

Earnings Growth Defies Geopolitical Noise

The S&P 500 delivered an 8.4% year-over-year earnings growth in Q1, with 74.5% of companies beating estimates. Excluding the energy sector, which faces a 12.82% monthly decline, the picture brightens further: earnings growth rises to 10.1%, and revenue growth holds at 4.5%. This underscores a bifurcated economy, where technology and healthcare thrive, while energy and consumer discretionary sectors lag.

The tech sector’s 15.3% earnings growth reflects surging AI-driven demand, with companies like SAP and BE Semiconductor reporting robust order books. Meanwhile, healthcare’s 36.4% earnings growth—despite regulatory headwinds over drug pricing—reveals the sector’s enduring strength. In contrast, energy stocks like Halliburton (-3.83%) and Baker Hughes (-5.87%) falter, victims of oversupply and geopolitical uncertainty.

Trade Tensions: A Double-Edged Sword

The US-China tariff saga continues to disrupt supply chains and pricing. Steel exports from China to the US face a staggering 145% tariff, crippling direct shipments. Domestically, China’s manufacturing sector—reliant on steel for 45% of demand—faces contraction, while exports to Southeast Asia (28% of total) teeter as tariff relief remains contingent on reciprocity.

The Fed’s Beige Book highlights tariffs as a “pervasive” concern, with mentions doubling over prior reports. Input costs for US manufacturers rose to a 13-month high, squeezing margins. Yet markets oscillate on whispers of de-escalation: the S&P 500 spiked 1.67% when tariff cuts were hinted at, only to retreat after Treasury Secretary Bessent emphasized the need for mutual action.

Sector Spotlight: Winners and Losers

• Healthcare: Outperformed on earnings but stumbled weekly (-0.47%) after proposals to cap drug prices.
• Tech: Led by AI investments, with BE Semiconductor’s AI order growth and SAP’s Q1 beat driving a 2.73% weekly gain in communication services.
• Energy: Plunged 17.6% YTD as oversupply and geopolitical risks cloud outlooks.
• Basic Materials: Surged 4.84% on Boliden’s earnings beat and trade optimism.

Macro Risks Loom

PMI data paints a bleak picture: the US composite PMI fell to a 16-month low of 51.2, with businesses citing tariff-driven costs. The Eurozone’s confidence hit a two-and-a-half-year low, while the UK’s PMI dropped below contractionary levels at 48.2. These readings suggest synchronized slowdowns, with trade tensions amplifying the pain.

Conclusion: Earnings Are the Anchor, but Risks Remain

Investors should prioritize companies with pricing power and exposure to secular trends like AI and healthcare innovation. The S&P 500’s 19.3x forward P/E suggests valuations are reasonable but not cheap—especially if earnings growth slows.

While US-China trade talks may offer temporary relief, true stability requires resolution. For now, the market’s focus on earnings resilience is justified: sectors like tech and healthcare are delivering, while laggards like energy face structural challenges. Investors ignoring earnings for geopolitical theatrics risk missing the forest for the tariffs.

The path forward hinges on two questions: Can earnings growth sustain momentum without further policy escalation? And will corporations adapt fast enough to navigate this volatile landscape? The answers will determine whether the Sino-American rivalry remains a sideshow—or the main event.