Key Themes to Watch as Earnings Season Kicks Off

US stocks have swung from a dramatic April selloff to new heights, and investors are bracing for the weakest earnings season since mid-2023. Expectations are modest, with a 2.5% year-on-year profit rise forecasted for the S&P 500 Index. However, lower estimates could be easier for companies to beat, and recent guidance suggests companies could exceed estimates easily. Five key themes to watch include the impact of tariffs on supply chains and costs, earnings revision momentum, net income margins, AI spending, and the effects of trade uncertainty.

US stocks have swung from a dramatic April selloff to new heights, and investors are bracing for the weakest earnings season since mid-2023. Expectations are modest, with a 2.5% year-on-year profit rise forecasted for the S&P 500 Index [1]. However, lower estimates could be easier for companies to beat, and recent guidance suggests companies could exceed estimates easily.

Five key themes to watch include the impact of tariffs on supply chains and costs, earnings revision momentum, net income margins, AI spending, and the effects of trade uncertainty.

Trade War Impact Yet to Show
Tariffs are poised to disrupt supply chains and raise costs, which market watchers see weighing on America’s profit engine. However, those impacts may not be pronounced in second-quarter earnings just yet. There is scant evidence of material demand destruction related to tariffs at this point, but also no big rebound in macroeconomic conditions since many of the harshest levies were announced and then paused, according to a recent industry survey led by Bank of America Corp. analyst Andrew Obin [1].

Earnings Revision Momentum
Earnings revision momentum — the difference between upward and downward adjustments to forecasts — turned positive for the second quarter after dropping in the last reporting cycle, according to BI data [1]. BI analysts expect S&P 500 net income margins to hit their lowest level since the first quarter of 2024 after climbing for five consecutive quarters. The decrease is likely to be fleeting, however, with margin calculations pointing to expansion next quarter and at least until the end of 2026, per BI [1].

Tech Giants Still Spend on AI
Trade and broader macroeconomic uncertainty hasn’t stopped American technology giants from big spending, especially on developing artificial intelligence products. Microsoft Corp., Meta Platforms Inc., Amazon.com Inc. and Alphabet Inc. are projected to put about $337 billion into capital expenditures in their fiscal 2026, up from $311 billion in the current year, according to the average of analyst estimates compiled by Bloomberg [1]. The lion’s share of S&P 500 earnings continue to come from the Big Tech companies seen as major beneficiaries of advancements in AI. The so-called Magnificent Seven firms — Apple Inc., Microsoft, Alphabet, Amazon, Nvidia Corp., Meta and Tesla Inc. — are expected to post a 14% rise in profits in the second quarter [1].

Stock-Picker’s Market
Stocks are projected to trade out of sync at a rate seen few times in recent history. A measure of expected one-month correlation between S&P 500 companies is sitting at 0.12, data compiled by Bloomberg show [1]. “There’s good money to be made, but you gotta be a stock picker,” said Lisa Shalett, the chief investment officer of Morgan Stanley’s wealth management division [1].

Downgrades in Europe
In Europe, analysts have slashed estimates on fears that Trump’s trade war would hurt margins. A Citigroup Inc. index shows profit downgrades have consistently outnumbered upgrades since mid-March [1]. The reductions have hit tariff-exposed automakers and miners, as well as defense stocks, according to Goldman Sachs Group Inc. strategists [1]. Their analysis shows margin compression was the biggest driver of the negative revisions.

Bearish Dollar
Uncertainty over Trump’s trade policies and his push for Federal Reserve interest-rate cuts has put a dent in the dollar. That’s a welcome development for US exporters. The dollar is down 10% this year and posted its worst first-half since 1973, according to data from BlackRock, which sees more room for the currency to fall [1]. Companies including Meta and Microsoft said last quarter that they expect foreign exchange to boost revenue by hundreds of millions of dollars [1].

Conclusion
US stocks have swung from a dramatic April selloff to new heights, and investors are bracing for the weakest earnings season since mid-2023. The second-quarter earnings season is expected to bring a mix of challenges and opportunities, with key themes including the impact of tariffs, earnings revision momentum, AI spending, and the effects of trade uncertainty. As the results roll in, investors will be closely watching these themes to gauge the health and direction of the US stock market.

References
[1] https://www.bloomberg.com/news/articles/2025-07-12/five-themes-for-investors-to-watch-as-earnings-season-kicks-off