Earnings Battle Tariffs for Investor Focus
What happened last week?
The S&P 500, Dow and Nasdaq slipped by -0.31%, -1.02%, and -0.08%, respectively.
However, the S&P 500 and Nasdaq made new all-time highs during the week powered by tech and AI which offset rising trade uncertainty as the administration assigned new tariffs on copper, Canada and other countries.
Volatility, as measured by the VIX index, remained subdued during the tariff announcements. Fed Chair Powell noted inflation has eased but not enough to provide the “confidence” the Fed needs to lower rates.
3 Things to Know
Markets Have Brushed Aside President Trump’s Renewed Tariff Threats
While negotiations with other large trading partners like Europe, Mexico, and China are still ongoing until the new August 1st deadline, investors are no longer discounting a dramatic rise in tariff rates as in April.
We believe markets underestimate the likelihood and magnitude of these tariffs being enacted – and the impact on corporate margins and prices. As we’ve stated before, while the market may be past peak tariff shock, we are still a long way from peak tariff impact.
While short-term factors like seasonality, market momentum, and a low bar for earnings have kept risk sentiment afloat, we maintain a neutral equities stance in core portfolios recognizing that current market levels insufficiently account for downside risks.
“OBBBA” Bill Provides (eventual) Potential Upside to Capex
The permanence of the tax bill provisions limits the need for expediency in businesses initiating new projects.
In the near term, we remain skeptical of an increase in earnings expectations on the back of this bill as companies must navigate larger macro issues, such as restrictive monetary policy and tariff whiplash.
These factors may neutralize some of this pro-business domestic policy, particularly for projects that require leverage or imported materials, despite the market positive signaling and reaching new all-time highs.
At the sector level, we see cross-cutting impacts from OBBBA. Among beneficiaries, US defense contractors will see another $150bn in incremental Pentagon funding, focused on bolstering missile defense, artillery, and shipbuilding capacity.
Secondary beneficiaries from higher American capex also include machinery and industrial robotics names, but it may take several quarters for a pickup in new orders to materialize. We will be tracking new capex announcements during 2Q earnings season, with a particular eye on the time horizon for said investments.
Not all sectors were winners from the OBBBA, as clean energy and EV firms lose significant IRA subsidies beginning September 30th. Cuts to social programs like food assistance and Medicaid are broadly negative for staples food producers and smaller health care providers, respectively.
Banks Will Set the Tone for 2Q Earnings this Week
US banks have rallied nearly 10% since mid-June, boosted by successful 2025 stress tests that foreshadow higher payouts to shareholders in the year ahead.
Big banks should deliver another strong quarter for trading revenues amid a rollercoaster for markets, while somewhat reduced macro uncertainty and improving loan growth bodes well for net interest income.
The outlook for dealmaking activity in 2H will be a key point of focus among analysts, with important knock-on effects for asset managers who have lagged the banks so far year-to-date.
2Q results come at a critical moment as bank valuations approach post-GFC highs. US Banks currently trade at 1.6x book value, the 99th percentile since 2010, though there remains significant dispersion within the sector.
Bank bulls would argue that this time is truly different, with regulatory tailwinds, yield curve normalization, and an uptick in M&A activity justifying structurally higher multiples. Importantly for global portfolios, Financials have been a key component of momentum trades leading the market higher since April.
With momentum taking a bit of a pause as laggards catch up, next week’s earnings will be a key as we assess market internals.
See our weekly CIO Strategy Bulletin for more details