With a new record on the Nasdaq 100 and fresh highs since February on the SP500, investors anticipate another strong quarter. The bar is set high with S&P 500 earnings expected to rise 20%, on 8% revenue growth.
High expectations mean more downside risk in case of any shortcomings, and even more so in the current context of political uncertainty.
Q2 earnings: what to expect
- Increasing corporate spending, share buyback, dividends and M&A indicate no signs of a slowdown
- A study by UBS analysing company transcripts shows management sentiment is at a high and has been rising across almost all sectors in the US, which suggests companies should remain globally optimistic
- Nevertheless, some companies may start to factor in trade tariffs and tighter financial conditions in their projections. This could add some volatility and widen already visible performance gaps between sectors
Earnings vs trade tensions
While Q1 was spectacular (earnings growth of 24%, on 8% revenue growth), markets still struggled during the course of earnings season due to rising rates and trade worries.
Trade tensions escalated, with Trump more determined than ever, but still the US markets managed to reach fresh highs. With investors seemingly shifting their focus back into fundamentals, strong corporate earnings should overcome political uncertainties – at least until the earnings season is over.
However, trade worries could knock at the door again as soon as end of August, when the US will decide whether or not to impose an additional 10% tax on $200B worth of Chinese products. Trump proved less of a bluff than most people thought, and with his popularity rate growing he may very well go ahead with the tax. China would then retaliate, leading to further escalation. It is not impossible that Trump would go as a far as $500B in tariffs, as he has threatened. At that point, it would become hard for anyone to ignore.
Graphically the S&P 500 (Daily) crossed above a critical resistance around 2795, printing fresh highs since February. While the resistance is not completely cleared and momentum remains relatively slow, a strong Q2 could provide the steam for a return back to the January high at 2872, and potentially higher.