Fears of what a global trade war would do to the economy have been holding investor sentiment back. That doesn’t mean the stock market isn’t doing well—it is. The S&P 500, Nasdaq, and TSX are all at record levels.
If anything, investors are anxiously waiting to see how stocks did in the second quarter. U.S. President Donald Trump launched his global trade war on April 2, the start of the second quarter. This will be the first full quarter in which we will see just what kind of impact those tariffs have had on earnings.
And right now, companies are reporting mixed results.
What Are Second-Quarter Earnings Like?
As of this July 28 writing, approximately 35% of S&P 500 companies have reported their second-quarter results. Of those, 80% have reported earnings per share above estimates. That’s actually above the five-year average of 78% and the 10-year average of 75%.
On the other hand, in aggregate, S&P 500 companies are reporting earnings that are slightly more than 6% above estimates, which is below the five-year average of 9.1% and below the 10-year average of 6.9%.
For the most part, though, second-quarter results have been largely positive because the earnings bar was pretty low. Analysts lowered their earnings guidance amid the unpredictability of tariffs, stock valuations that are at nosebleed levels, and concerns about the U.S. economy. Earnings haven’t been blockbuster, but they have been decent.
Big banks continue to do well, with JPMorgan reporting a second-quarter earnings and revenue beat. Alphabet, Netflix, Hasbro, and AT&T reported an earnings beat too and, despite tariffs, remain optimistic. Americans might be concerned about the economy and tariffs, but continue to spend, which helps juice corporate earnings.
It’s not all positive. Companies that are more directly impacted by tariffs are seeing their earnings take a big hit. Automakers like General Motors saw their adjusted earnings tumble 17% and core profits fall 31.6%. Volkswagen cut its guidance after taking a $1.5 billion hit from U.S. tariffs. And Hyundai saw its profits fall 16% in the second quarter with U.S. tariffs costing the company USD$606.4 million. It warned that tariff costs will be even bigger in the third quarter. While these are bad numbers, it’s important to note that they are all still profitable.
What Is the Outlook for the Economy and the S&P 500?
Investors are worried about tariffs, but stocks are at record levels. Why? Stocks have been climbing higher because of the way President Trump is positioning tariffs. He initially said he was going to impose very high tariffs of 25% across the board, but then announced lower ones.
Investors, it seems, have responded positively to the lowered expectations. And that has sent the S&P 500 and even the TSX to record levels.
Tariffs aside, there are other reasons to remain optimistic about the S&P 500 and TSX. U.S. consumer spending remains solid, and the U.S. job market continues to post solid gains. This should help the U.S. avoid a recession. The U.S. economy is expected to slow over the next few quarters but then recover.
Investor optimism is also being buoyed by a trade deal between the U.S. and European Union (EU), the world’s largest trading bloc, which includes a baseline tariff of 15% on EU imports. President Trump called it “the biggest of all deals.”
The deal is similar to the one the U.S. announced the previous week with Japan, the world’s fourth-largest economy. The recent trade deals could also reflect the kind of trade deal that Canada could seal with the U.S.
Looking ahead, should the U.S. ink a favourable trade deal with China, the world’s second biggest economy, the markets should respond favourably.
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