logo
Is Wall Street still too bearish on the impact of tariffs?

Is Wall Street still too bearish on the impact of tariffs?

Business Times7 days ago
'LIBERATION Day' feels like a long time ago. Since US President Donald Trump shocked markets with sky-high new tariff rates and a hasty U-turn, the S&P 500 Index has rebounded to all-time highs, and there's a pervasive sentiment that Wall Street is recklessly ignoring economic risks that haven't really gone away. Earnings season may, however, provide further fuel for the rally.
Earnings estimates for the more trade-sensitive companies still haven't rebounded from the very serious hit they took after Apr 2. Maybe (just maybe) we'll start to see that happen as companies announce their quarterly results. Though tariffs are no joke for profit margins, many large companies are finding ways to mitigate the impact, and there's no clear sign that the levies will precipitate the economic downturn that many initially feared.
Consider consumer discretionary stocks. Excluding special cases Amazon.com and Tesla, sellside analysts are projecting a 6.2 per cent contraction in S&P 500 discretionary earnings this calendar year. The outlook collapsed after Liberation Day and has remained gloomy. The speed and scope of the downward earnings revisions for the sector since early April were the worst in 20 years outside of 2020 (the start of the Covid-19 pandemic) and 2008 (the onset of the financial crisis). Even if 2025 isn't all sunshine and roses for these companies, Wall Street may still be a bit too negative.
We can observe a similar collapse of earnings expectations across the entire S&P 500 if we carve out the so-called Magnificent 7 group of mega-capitalisation growth stocks. Analysts now project modest declines this year for consumer staples, and the rebound in industrial earnings is expected to be weaker than what was estimated early in 2025. Among the non-Magnificent-7 cohort, it's noteworthy that analysts soured not only on profit margins but also on revenues. The latter has room to recover even in an environment of enduring tariffs, as long as we assume that the US economy will skirt a downturn.
If analysts are so down on so many stocks, how has the index performed as well as it has? Basically, it's the same old story of Magnificent 7 exceptionalism, with a special emphasis on a few standouts among them. America's superstar mega-cap stocks are putting the market on their shoulders, driven by extraordinary underlying growth and optimism about artificial intelligence (AI).
The trade war briefly hit earnings expectations for the likes of Nvidia and Amazon, but they swiftly bounced back. More than just a retailer, Amazon has a massive cloud business that's relatively trade-proof, and Nvidia has benefited from positive reversals in policy since the trade war first broke loose (more on that later).
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
Sign Up
Sign Up
Microsoft, Meta Platforms and Alphabet never lost their mojo in the eyes of analysts, a reflection of business models that weren't highly exposed to the changes that Trump introduced. Of the entire group, only Apple and Tesla have seen an enduring drop in earnings expectations after early April. For Tesla, trade is just one in a confluence of factors that includes Elon Musk's dramatic fallout with Trump and the pending loss of electric vehicle tax credits.
Investors are also learning that some of these stocks qualify for special treatment from the Trump administration. This week, the government reversed course on restricting shipments of key AI processors to China, unlocking billions in potential revenue for Nvidia and rival Advanced Micro Devices.
Whether this Magnificent 5 leadership is a blessing or a hazard is still mostly in the eye of the beholder. Certainly, the lofty expectations implicit in these companies' valuations come with risks of their own, but they're generally separate from the question of whether markets are appropriately pricing tariff policy. In the meantime, investors are benefiting handsomely.
Moreover, equity investors have other developments to cheer for. The Republican tax and spending package, known as the One Big Beautiful Bill Act, enshrines tax benefits on domestic and international income that Morgan Stanley said could benefit companies across a range of industries, including tech and communication services. On the trade front, Bloomberg reported that President Trump had softened his tone with China to set the table for a summit with counterpart Xi Jinping.
Could the tariff story take another turn for the worse? Absolutely. Trump is still unveiling new threats, and ongoing trade investigations could push the effective rate closer to 20 per cent before the tariff drama is over. Most major trading partners have responded cautiously so far, but an all-out trade war with the likes of the European Union could change the calculus rather quickly. Despite the perception that Trump has backtracked, the average tariff rate still stands at about 13 per cent today, comparable to the 1940s, and it's possible that significant economic damage is already in train with a lag.
Yet, unlike small businesses, large-cap stocks have extraordinary negotiating power with their suppliers, and the dispirited forecasts in key sectors suggest that there could, optimistically speaking, be room for analysts to start revising earnings higher rather than lower this earnings season. If that happens, we may yet see some modest upside in the US market. BLOOMBERG
Orange background

Try Our AI Features

Explore what Daily8 AI can do for you:

Comments

No comments yet...

Related Articles

Barclays profit up 23% as Trump tariff turmoil lifts trading
Barclays profit up 23% as Trump tariff turmoil lifts trading

Business Times

timean hour ago

  • Business Times

Barclays profit up 23% as Trump tariff turmoil lifts trading

[LONDON] Barclays first-half profit rose by a better-than-expected 23 per cent, the British bank said on Tuesday (Jul 29), with its markets business reaping bumper returns from the frenzied trading activity sparked by US President Donald Trump's trade tariffs. Pretax profit for the January-June period totalled £5.2 billion (S$8.92 billion), above analysts' average forecast of £4.96 billion. The bank also announced a share buyback of £1 billion and a half year dividend of 3 pence per share, equating to £1.4 billion of total capital distributions to shareholders, up 21 per cent from the year before. The earnings update from the Britain and US-focused lender showed continued progress in its strategy to cut costs and prioritise spending on its domestic, retail and corporate focused unit above its investment bank. 'We remain on track to achieve the objectives of our three-year plan, delivering structurally higher and more stable returns for our investors,' CEO C S Venkatakrishnan said in the statement. The lender's investment bank nonetheless followed Wall Street peers in reporting a robust second quarter, as market turmoil led to increased trading activity in fixed income products and stocks in particular. Second-quarter income in the investment bank was £3.3 billion, better than the £3 billion forecast by analysts, thanks to strong gains in those trading businesses that offset a decline in fees from advising on deals. REUTERS

China social spending hits highest level in nearly two decades
China social spending hits highest level in nearly two decades

Straits Times

time2 hours ago

  • Straits Times

China social spending hits highest level in nearly two decades

China announced on July 28 that it will start offering nationwide cash handouts to families as an incentive for couples to have children. China's government spending has pivoted toward social welfare to a degree unseen for at least a generation, as it runs a record budget deficit with a focus on boosting consumption to cushion the blow from Donald Trump's tariffs . The latest evidence arrived on July 28, when China announced it will start offering nationwide cash handouts to families as an incentive for couples to have children. While Beijing is channeling less on-budget investment into infrastructure, expenditure that covers outlays ranging from education to employment and social security climbed to nearly 5.7 trillion yuan (S$1.02 trillion) in the first half – the highest for the period since the data series began in 2007. That represents an increase of 6.4 per cent from a year earlier, according to Bloomberg calculations based on figures published by the Ministry of Finance. Authorities could renew their pledge to prioritise support for domestic demand, as top officials prepare to meet this month to set the economic agenda for the rest of the year while trade talks with Washington continue. The splurge was almost double the increase in total spending under the general public budget, the first and biggest account among the government's four fiscal books. Infrastructure-related expenditure in the account – allocated for costs such as environmental protection, irrigation facilities and transportation – was 4.5 per cent less than a year earlier. Fiscal priorities have shifted after the trade war unleashed by Trump threatened China with millions of job losses and put pressure on its patchy social safety net. Under the new policy of childcare subsidies, the government will spend 3,600 yuan a year per kid under the age of three, according to the official Xinhua News Agency. Citigroup Inc. estimates a total lump-sum payout of 117 billion yuan in the second half of 2025, while Morgan Stanley puts the program's annual cost at 100 billion yuan, assuming about 9 million births a year. Although President Xi Jinping has in the past resisted large-scale handouts to families over what he's called 'welfarism', China responded in recent months by ramping up government support for households. The goal is partly to bolster domestic demand in the face of US tariffs, which have sent the country's shipments to the world's biggest consumer market slumping this year. 'Better supporting people's well-being will help boost domestic demand and is part of the rebalancing of the Chinese economy,' said Mr Tommy Xie, head of Asia macro research at Oversea-Chinese Banking Corp. At the same time, China launched construction of a 1.2 trillion yuan mega-dam in Tibet in July, a massive project that will likely take years to complete. 'The room for infrastructure expansion in the future will shrink marginally' even though it can play a 'supporting role at critical times,' OCBC's Mr Xie said. Social security and employment saw the biggest gain in spending related to people's well-being, up almost 8 per cent in the first half from 2024. A survey carried out by China's central bank showed an employment sentiment index hit a record low in the second quarter, illustrating the need for more government aid for job seekers. Outlays on education increased 5.9 per cent and rose 4 per cent on medical treatment and health care. Meanwhile local governments' tapping of the annual quota of new bonds meant mainly for infrastructure investment slowed. Provinces have issued about 56 per cent of new special local bonds allowed for this year, down from an average of 61 per cent for January-July in the five years through 2024, according to Bloomberg calculations based on MOF numbers. Previously, the favored way to jumpstart growth was by spending on areas like roads, railways or industrial parks, much of it done by provincial governments. Instead, the government has accelerated the issuance of sovereign notes this year, primarily to cover the budget shortfall for routine public expenditure. Chinese provinces also sold substantial volumes of bonds in the first seven months to refinance their so-called hidden debt, as Beijing seeks to contain credit risks from deteriorating local finances. Government borrowing was crucial for replenishing state coffers depleted by China's years-long property slump. Revenue from real estate-related taxes, including deeds and urban land use, fell 5.6 per cent on year in the first half to 975.3 billion yuan. Provinces earned 1.43 trillion yuan in the period from selling land, a contraction of 6.5 per cent despite a rebound of over 20 per cent in June thanks to market recovery in some big cities. Economists at Goldman Sachs Group Inc. cautioned, however, on 'the sustainability of land sales revenue improvement' and maintained their forecast that government land sales revenue may decline further this year by up to 10 per cent. Total tax revenue shrank 1.2 per cent on year in the first half to 9.29 trillion yuan, with income from levies on such transactions as vehicle purchases posting double-digit declines. Non-tax revenue – which includes compensation for the use of state-controlled resources and assets and fines – rose 3.7 per cent to 2.27 trillion yuan. It grew despite a decline in the money collected from fines, a Finance Ministry official said at a Friday briefing. Revenue from the tax on vehicle purchases plunged 19.1 per cent in January-June from 2024, the biggest drop among all categories and more than triple its decline in the same period of 2024. Slumping income from the vehicle purchase tax shows the impact of the government's decision to extend the suspension of a levy on buying new energy vehicles, such as electric cars, to 2027, Huachuang Securities analysts including Zhang Yu wrote in a note on July 25. The shift away from fuel-powered cars also weighed on revenue from the consumption tax by reducing demand for gasoline and diesel, they said. The government is losing a total of 265 billion yuan per year in revenues from the vehicle purchase tax and the consumption levy due to the pivot to cars powered by alternative-energy sources, Huachuang Securities estimates. BLOOMBERG

PBOC finds consumer mood is turning darker even as economy grows
PBOC finds consumer mood is turning darker even as economy grows

Business Times

time3 hours ago

  • Business Times

PBOC finds consumer mood is turning darker even as economy grows

[BEIJING] Chinese households became more pessimistic last quarter and their view of the jobs market fell to the worst ever, according to a survey by the central bank, a worry for an economy that risks a slowdown ahead after growing faster than the government's target for much of this year. Consumers turned increasingly negative about income, employment, and prices in April to June, the poll showed. The release of the survey results has become unpredictable in recent years, with the data for the first and second quarters published at the same time on Friday (Jul 25) instead of at a regular interval as in the past. The figures throw a spotlight on a worsening vulnerability for China, whose economy powered through US President Donald Trump's trade war largely on the strength of its exports. The data also revealed that people's willingness to consume dropped to the weakest since the outbreak of the pandemic, with almost two-thirds of respondents saying they want to save more, while an employment index fell to a record low. 'The latest data paint a downbeat picture,' Goldman Sachs economists led by Yuting Yang said in a note. Deepening household pessimism about income and employment likely means that faster retail sales growth since late last year was mostly thanks to government subsidies, instead of improving consumer sentiment. It underlines the challenge for Chinese policymakers to prop up consumption in a sustainable way in the absence of an improvement in the labour market. BT in your inbox Start and end each day with the latest news stories and analyses delivered straight to your inbox. Sign Up Sign Up Retail sales grew 5 per cent in the first half of the year, an improvement from 2024 but still weak compared with an 8.2 per cent expansion in the same period before the pandemic in 2019. That drop in demand has created an oversupply of many goods, pushing prices down. The data also showed a shrinking percentage of respondents expecting consumer and housing prices to rise. It's an outlook that spells more trouble for the property sector, which has seen home prices falling since 2022 and continues to erode people's wealth as the value of their assets drops. Loan demand from companies of all sizes fell in the second quarter from the first three months of the year, according to a separate survey of banks, with the indicator of overall loan appetite dropping by more than 16 points to the weakest level since at least 2009. The GDP deflator, a broad measure of prices across the economy, declined for the ninth consecutive quarter, extending the longest streak since the quarterly data began in 1993. Little relief appears in sight, with the price expectation index falling again in the second quarter. The People's Bank of China (PBOC) surveyed 20,000 bank depositors in 50 cities across the country, about 3,200 banks and over 5,000 companies for the surveys. BLOOMBERG

DOWNLOAD THE APP

Get Started Now: Download the App

Ready to dive into a world of global content with local flavor? Download Daily8 app today from your preferred app store and start exploring.
app-storeplay-store