Earnings Surge 7.9% Despite Trade War Uncertainty
2min read Market participants are grappling with a trillion-dollar question: should they trust the optimistic earnings expectations for 2025, given the backdrop of the trade war initiated by the Trump administration?
Kali Cox, Chief Market Strategist at a wealth management firm, emphasized the importance of considering the context when evaluating these expectations. She noted that while it is crucial to pay attention to earnings and revenue surprises, investors should also be mindful of the broader economic landscape.
The first quarter earnings season progressed smoothly, as it was the last quarter before the impact of Trump's tariff policies became evident. Companies in the S&P 500 index reported a 7.9% year-over-year increase in earnings, with an average earnings surprise of 10.2%, significantly higher than the long-term average of 5.2%.
However, there are doubts about whether these companies can achieve the projected 10% growth in earnings per share and maintain their valuation prospects. Cox warned that many on Wall Street are concerned that the worst is yet to come, as the impact of tariffs on both corporate executives and consumers becomes more apparent.
Following the "Liberation Day" in early April, the stock market experienced a significant decline, hitting a low on April 7. However, as earnings reports were released, the market rebounded later that month. James Quincey, Chairman and CEO of coca-cola, noted a decrease in consumer purchases at supermarkets, indicating financial strain on lower-income consumers and the influence of geopolitical factors.
Brian Niccol, CEO of starbucks, also acknowledged a slowdown in consumer demand, with the company reporting a 1% decline in same-store sales in North America for the quarter. Cox advised investors to maintain a rational perspective amidst market volatility, sticking to their investment plans rather than making impulsive trades.
She recommended that investors remember their initial investment goals and consider all available data, but to be particularly attentive to comments from company management. Regarding earnings expectations, Cox advised caution, noting that many factors could change between now and the end of the year.
One significant uncertainty is the Federal Reserve's interest rate policy. While the Fed has been raising rates in recent years, the economic uncertainty caused by the trade war has made future actions less predictable. Changes in interest rates can have a substantial impact on corporate earnings, as higher rates increase borrowing costs and compress profit margins, while lower rates facilitate borrowing and investment, potentially driving earnings growth.
Another factor to consider is the strength of the U.S. dollar. A stronger dollar makes American exports more expensive, potentially harming the international sales of many S&P 500 companies that derive a significant portion of their revenue from overseas markets. Additionally, ongoing trade disputes could disrupt global supply chains, leading to increased costs for businesses.
Geopolitical tensions worldwide, such as those in the Middle East and Europe, can also affect corporate earnings by causing fluctuations in energy prices and other commodities, impacting various industries. In summary, while earnings expectations are a valuable tool for investors, they should not be the sole basis for investment decisions.
In the current environment of trade wars and economic uncertainty, investors need to adopt a comprehensive approach, considering all factors that could influence corporate earnings and stock prices. By doing so, they can better navigate the market and make more informed investment choices.
