Earnings Defy Policy Pressures
What happened last week?
S&P 500 second quarter earnings are off to a better-than-expected start. With just over 10% of S&P 500 companies reporting, 2Q25 results are beating expectations by 7.8% and are up 10.5% from a year ago.
The Financials sector is outperforming expectations driven by stronger-than-anticipated results across big banks, insurers and capital markets firms.
Thus far, the sector is beating estimates by 10.9% while earnings are up 17.6% year over year.
3 Things to Know
Inflation Data Showing Subtle Hints of Tariffs
We noticed the sharpest rise in prices centered in specialized goods areas where substitutes are limited, evinced by window and floor coverings increasing 4% in June while appliances rose 2%.
In contrast, recent corporate commentary indicates that larger multinational companies with diverse supply chains and revenue segments have the ability to build inventory and source products elsewhere, softening the price pass-through to consumers in goods.
Taken together, we see the impact of tariffs as uneven across industries when comparing companies focused on narrow product channels relative to large, diversified suppliers, for example. It will ultimately take time to measure the shared impact on margins and consumers, with this earnings season as a key checkpoint.
Beyond the raw data, we are monitoring consumer inflation expectations surveys for the psychological pass-through of initial tariff pressures into consumer behavior.
Political Pressure on Fed Escalates Further
We view the independence of the Fed as critical to maintain and President Trump read the market view as similar after the negative reaction and downplayed the news within two hours.
We see two key implications from this escalation: 1) political pressure to subvert Fed independence and headline whiplash will continue until Chair Powell’s term ends in May 2026 and 2) the President will require his next Chair nominee to be dovish and push the committee for lower policy rates.
Importantly, however, the decision to lower policy rates is a committee vote, and the Chair holds limited sway on where votes land. We see the FOMC remaining steadfast in their data dependence regardless of the Chair and maintaining current policy rates through 3Q, until either a significant deterioration in labor market data or further disinflation.
Bank Earnings Showcasing Resilient Economy in 2Q
We view diversified banks as beneficiaries in a higher-rate, more volatile environment, but valuations near post-GFC highs and crowded ownership are headwinds for top bank outperformance.
In positive signs for the health of the consumer and deal activity, net loans deemed uncollectible (charge-offs) were below expectations while major investment banks highlighted growing M&A activity.
If financial conditions remain loose with range-bound rates and strong equity prices, we see this as a good sign that the nascent recovery in M&A can continue as focus turns to deregulation.
Overall, earnings season initially points to a benign economic environment in 2Q, supporting the recent recovery in lagging sectors and small companies that are also popular shorts.
See our weekly CIO Strategy Bulletin for more details