Stocks have this other considerable challenge to face
Wall Street may be wise to sharpen its earnings estimates.
S&P 500 (^GSPC) consensus earnings estimates currently call for 9% year-over-year growth this year, followed by 14.3% growth in 2026.
Longtime markets strategist Adam Parker at Trivariate Research thinks these numbers are way too high, all things being considered.
"We expect more than normal downward EPS revisions this year," Parker, who held the chief US equity strategist role at Sanford Bernstein and Morgan Stanley, said in a new note on Thursday.
Parker is getting out in front of the potential Wall Street profit estimate chopping. He thinks earnings will only rise 1% this year and 4% next year.
He warned that the penalty for companies missing earnings estimates, in part caused by too-high analyst forecasts, could be severe.
Watch: How this beer-making CEO is dealing with tariffs
The recent penalty for revisions of greater than 5% has been harsh, Parker said, with the average penalty the last two months in the fourth percentile of the past 25 years.
Recent companies that have been penalized for warnings in the past month include economic bellwethers Delta (DAL) and Nike (NKE). Shares have gone on to lose 13% and 25%, respectively, in the past month.
"We think the consensus numbers need to be materially lowered, and the penalty for downward revisions has been harsh," Parker added. "This combination keeps us cautious with so many companies about to report earnings in the next two weeks."
The risks to corporate profits this year are twofold, with one the byproduct of the other.
First up is the Trump administration's scattered approach to its tariff policy, which is paralyzing corporate decision making and causing demand fluctuations.
On April 9, the Trump administration announced a 90-day pause on all reciprocal tariffs, except China. Tariffs on one of the US's most important trading partners now stand at 145% — the sum of a 125% reciprocal tariff and 20% that Trump previously levied.
A 10% across-the-board duty is still being applied to all other imports.
Read more: What Trump's tariffs mean for the economy and your wallet
On Wednesday, China signaled it's ready to resume trade talks with the US — if Washington shows respect and appoints a trusted negotiator.
The administration further refined its tariff plans on April 11.
The White House issued a rule that spared smartphones, computers, semiconductors, and other electronics from reciprocal tariffs, especially the harsher tariffs on Chinese goods. US Customs and Border Protection said the goods would be excluded from Trump's 10% global tariff and the 125% reciprocal Chinese tariffs.
But the administration is eyeing a tariff on semiconductors to be unveiled in a few weeks.
All in, progress on trade deals remains murky at best.
"Let's set aside China. There are 15 large trading partners. We set aside China. There are 14, and we're in rapid motion and setting up a process for the 14 largest trading partners, most of whom have very large deficits," US Treasury Secretary Scott Bessent told Yahoo Finance Tuesday in an exclusive interview. "So, in 90 days, are we going to have a complete doc, a formal legal document done and dusted? Not likely."
And that creates the other headwind to corporate profits this year: a Federal Reserve that may not be able to juice the economy through rate cuts as it deals with potential tariff-driven inflation.
Listen: Is the bond market in a crisis?
'We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension,' Fed Chair Jerome Powell said in a speech at the Economic Club of Chicago on Wednesday. 'If that were to occur, we would consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close.'
Stocks promptly sold off, with the Dow Jones Industrial Average (^DJI) shedding nearly 700 points.
"We're probably moving to a 30, 30, 40 portfolio world — so 30% commodities, 30% bonds, it depends on the age of the investor, and say 40% stocks," Larry McDonald, investor, author, and founder of The Bear Traps Report, said on Yahoo Finance's Opening Bid podcast.
McDonald said the market backdrop is such that investors should own more hard assets in gold and ETFs that have exposure to copper.
Given how inflated EPS estimates appear to be and the risk associated with that, that type of portfolio construction seems appropriate.
Brian Sozzi is Yahoo Finance's Executive Editor. Follow Sozzi on X @BrianSozzi, Instagram, and LinkedIn. Tips on stories? Email brian.sozzi@yahoofinance.com.
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