We're looking at the wrong earnings season
With 80% of S&P 500 (.SPX), opens new tab firms now having reported second-quarter updates, the blended annual profit growth estimate, which aggregates what's been published with forecasts for the remaining 20% of the index, is running at 12%, according to LSEG data.
That's more than twice the low-balled expectations that were baked in a month ago, when they were still being dragged down by the uncertainties related to April's "Liberation Day" tariffs - postponed of course for 90 days until this week.
Curiously, that 12% pace is exactly what was forecast for the second quarter back on January 1, which gives an impression the much-feared tariff impact evaporated in a puff of smoke despite April's turbulence.
But it's partly because very little actually happened tariff-wise in the second quarter. And frantic preparations, including import front-loading and inventory stockpiling, likely offset a lot of what has kicked in to date.
And, of course, the dominant artificial intelligence theme once again drove the performance of a handful of megacaps to flatter the index's average, with eye-watering 44% and 23% annual growth recorded in the communications services and technology sectors respectively - both above January's forecast.
And that's with less than half of the companies in these hot sectors having updated so far, with chip behemoth Nvidia's (NVDA.O), opens new tab earnings not due out until August 27.
By contrast, the equivalent blended readout for consumer discretionary stocks was half as strong as the total, and consumer staples earnings are flatlining. And both are still below January's outlook.
What's more, energy sector earnings are running at a negative 20% annually and utility and materials sector earnings are also in the red over the past year.
As BlackRock's investment strategists pointed out this week, the $27 billion of federal tariff revenues recorded for June mean someone must be paying the levies and taking the hit - either businesses or consumers, or a mix of both.
And with an effective 18% overall U.S. tariff kicking in on Thursday, as Yale Budget Lab estimates, that tax revenue tally is only going to go up for the third quarter. What was largely an uncertainty to date is now becoming a reality.
But assessing the overall picture requires separating out the impact of the AI theme, which is keeping the surface calm even with tariff-related undertows.
Automakers have clearly taken a whack from the trade disruption, for example, but the industrials sector that they're part of is still managing to generate 4% annual profit growth because it is also getting a lift from the AI-driven data centre buildout and the defence sector reboot.
What's more, the financials sector - which indirectly benefited from the whole tariff farrago due to the outsize market volatility and related financial trading revenues - is another unexpectedly strong performer with growth of 14%.
BlackRock describes the picture as a "tug-of-war" between tariffs and AI.
"The latter is winning so far, in our view, but getting granular views is key as companies and consumers each eat tariff costs," it concludes, saying it remains overweight U.S. stocks but continues to tread carefully, watching out for trade landmines.
When might those tariff hits show up in earnest?
Corporate guidance should clear up some of the horizon, but it too is affected by similar cross-currents.
HSBC's U.S. equity team points out that earnings revisions are moving higher for the tech and AI cohort as well as for financials and utilities. But these industries are relatively immune to tariffs, while those more susceptible - like consumer and healthcare groups - have seen their outlooks turn negative.
And while margins have held up more generally, HSBC doesn't foresee that continuing in the third quarter.
"We expect a more substantial hit in 3Q as inventories are drawn down and mitigation efforts take time," it told clients.
The trade disruption likely will take its toll on the market and the wider economy to some degree. Whether you can see it clearly on the whole is a different matter.
The opinions expressed here are those of the author, a columnist for Reuters.
-- Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. Follow ROI on LinkedIn. Plus, sign up for my weekday newsletter, Morning Bid U.S.
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
The Independent
28 minutes ago
- The Independent
Judge stops hazardous waste shipments to Michigan landfill from five states
A judge has stopped government contractors in five states from sending hazardous waste to a Michigan landfill after a year of legal challenges by Detroit-area communities concerned about possible environmental impacts. Wayne County Judge Kevin Cox said the risk was 'substantial and compelling' and outweighed the financial harm to Wayne Disposal, a suburban Detroit landfill operated by trash giant Republic Services. Cox's injunction, signed Tuesday, bars Wayne Disposal from accepting waste from Luckey, Ohio; Middletown, Iowa; Deepwater, New Jersey; Lewiston, New York; and St. Louis. Those cleanup sites are managed by the U.S. Army Corps of Engineers and its contractors. The waste includes materials that were produced for weapons, early atomic energy and other uses before and after World War II. Shipments 'have been halted and we are working closely with our contractors to determine the next steps,' Jenn Miller, a spokesperson in the Army Corps environmental division, said Thursday. Tainted soil in Lewiston is a legacy of the Manhattan Project, the secret government effort to develop atomic bombs during World War II. While the lawsuit in Michigan was pending, officials recently decided to send Lewiston soil to a Texas landfill to keep the project moving, Miller said. Wayne Disposal in Van Buren Township, 25 miles (40.2 kilometers) west of Detroit, is one of the few landfills in the U.S. that can handle certain hazardous waste. Republic Services has repeatedly said the landfill meets or exceeds rules to safely manage hazardous materials. The company said the court order was "overly broad.' 'Responsible management and disposal of these waste streams is an essential need, and Wayne Disposal, Inc. is designed and permitted to safely manage this material,' the company said. But critics say there are too many homes, schools and waterways near the landfill, making any leak at the site possibly dangerous. 'We stood strong with our community allies speaking collectively with one voice that we do not want this type of waste in our community," said Kevin McNamara, the elected supervisor in Van Buren Township.
Daily Mail
28 minutes ago
- Daily Mail
Rachel Reeves' NI tax raid is pushing up the price of food and it could get worse in the autumn, experts warn
Rachel Reeves ' tax raid on businesses is hitting households at the supermarket till, the Bank of England said. Hikes in National Insurance contributions (NICs) and the minimum wage were contributing to shoppers paying more for their food, the Bank said – and warned the situation will likely get worse. Food inflation hit 4.5 per cent in June, higher than economists had forecast in May, and is expected to peak at 5.5 per cent next month. Retail industry leaders warned that grocery inflation will accelerate even further if the Chancellor pushes ahead with tax hikes in the Autumn Budget. And the Bank flagged that Deputy Prime Minister Angela Rayner 's upcoming Workers' Rights Bill had piled more uncertainty on businesses. It came as the Bank's Monetary Policy Committee (MPC) slashed interest rates by 0.25 percentage points to four per cent after a knife-edge five to four vote – which required a second polling. The move is bad news for savers, who will now be paid a lower rate of interest on their nest eggs, but will please mortgage holders. Overall inflation is now expected to hit four per cent later this year, breaching the Bank's previous expectations and double its two per cent target. Bank governor Andrew Bailey said interest rates remain on a 'downward path' but cautioned 'there is genuine uncertainty about the course of that direction'. The Bank's Monetary Policy report, published alongside the rates cut, said that 'domestic labour costs are an important driver of food price inflation' partially due to the 6.7 per cent rise in the National Living Wage. 'Overall labour costs of supermarkets are likely to have been disproportionately affected by the lower threshold at which employers start paying NICs in part because a relatively high proportion of supermarket staff is employed part-time,' the report read. Higher employment costs have so far added 1 to 2 per cent to food prices – and a new packaging tax later this year is expected to pile further pressure on supermarkets. Ms Reeves – visiting Port Talbot in South Wales to announce £143million towards securing decrepit coal tips – said: 'This fifth interest rate cut since the election is welcome news, helping bring down the cost of mortgages and loans for families and businesses.' But Shadow Chancellor Sir Mel Stride told the Daily Mail that Mrs Reeves' choices would make it harder for people to put food on the table, adding: 'Labour's economic mismanagement is turning the screw on hard-working families. Many firms have no choice but to pass costs on to consumers.' Shoppers have already tried to reduce their supermarket spending by buying own-brand products, cheaper cuts of meat and larger value packs, the Bank report said. Grocers have also reported strong sales of 'premium ready meals' as Britons hold back on eating out in a bid to protect cash. As well as hiking prices, businesses have tried to save money by reducing staffing levels through redundancies and imposing hiring freezes, the report found. Bosses said they are looking at replacing workers with automation and artificial intelligence as well as off-shoring jobs. Helen Dickinson, chief executive at the British Retail Consortium (BRC), said government policies would add £7billion to retailer costs this year. 'Food prices have already been climbing steadily, and the BRC has warned this is only the beginning,' she said. 'If the Autumn Budget once again lands on the shoulders of retailers, then it will only serve to fan the flames of food inflation – with poorer families being hit the hardest by the Treasury's decisions.' Ms Dickinson added that retailers' 'ability to absorb further costs is extremely limited'. 'It will be ordinary households who suffer the most,' she said. The Bank's nine-person MPC was split three-ways before taking an unprecedented second vote on interest rates. Four voted for a quarter-point drop, four to keep the status quo and one for a half-point fall. The end result was that five, including Bailey, voted to cut rates while four – including the Bank's chief economist, Huw Pill – wanted to keep borrowing costs on hold. 'This group seems to be particularly concerned about the impact of recent higher inflation rates, particularly for food and fuel, on inflation expectations,' Oxford Economics chief economist Andrew Goodwin said. 'This suggests these members are unlikely to vote for cuts again until they see evidence of inflationary pressures cooling in these categories.'
The Sun
28 minutes ago
- The Sun
It's not just embattled Reeves' NI and inheritance tax raids squeezing the economy… Rayner's reckless proposal is too
Rayn cloud YESTERDAY'S interest rate cut may have provided a rare ray of sunshine for embattled Rachel Reeves. But the economic outlook still looks gloomy. 1 Firstly, inflation will rise to at least four per cent next month, in part thanks to the Chancellor's tax rises. — who says we are not yet 'out of the woods' — will be praying it doesn't get worse. If it does, households already exhausted by the last 18 months of tax increases and higher mortgage payments are in for still more pain to get inflation back under control. But there was also a major warning yesterday that it's not just Ms Reeves' National Insurance and inheritance tax raids squeezing the economy. Businesses surveyed by the Bank said Angela Rayner 's reckless proposed overhaul of workers' rights is also weighing down growth and investment. The Deputy PM — whose plans could hit the economy for £5billion a year and cost up to 50,000 jobs — fancies herself to run the country one day. Beware, PM So it's no exaggeration to say the success of Sir Keir Starmer's Government hinges on stopping the boats. The signs are not looking good. What is the Bank of England base rate and how does it affect me? Yesterday Yvette Cooper hailed the first illegal migrants to be detained under her new 'one in, one out' deal with France. But she refused to say how many — bizarrely insisting the information would be useful to people-smugglers. The Home Secretary was also silent on the fact it will take months — if not years — to successfully deport even a fraction of them. Until Britain quits the European Convention on Human Rights, or leads Europe-wide reform of it, her plans look doomed. Labour surely understands that, if it fails to get a proper grip, punishment at the ballot box will be devastating. Ali Bye Bye UNTIL resigning as Homelessness Minister last night, Labour's Rushanara Ali spent years railing against rogue landlords. So, when she was exposed for acting just like the very people she had criticised, public fury was sure to follow. Indeed, it's shameful she spent yesterday trying to cling on. Her claim that she 'followed all the rules' when she threw out tenants in a house she owns and put it up for sale — only to swiftly rent it out again for a higher fee — never passed the smell test. Her eviction from Government was the only option.
