The first half of the year was one heck of a ride. In case you missed it, so far this year we saw a new administration in the US, a record high for the S&P 500, the Mavericks trading Luka Doncic, Tom Cruise at 63 hanging off another airplane in another movie, a tariff policy that shocked the global trading order, a new Pope, an executive order renaming the Gulf of Mexico, the S&P falling 21%, the bombing of nuclear sites in the Middle East, and a new record for the S&P.
There was quite a bit of optimism coming into 2025 with the prospect of a new pro-business administration taking office. The S&P 500 was coming off of back-to-back 20% gains for the first time since the mid-1990’s. With valuations and positioning stretched and optimistic earnings expectations, this left markets susceptible to volatility.
The new administration took office and aggressively set out to implement policy changes focused on cost cutting, border security and the realignment of global trade. Markets were caught flat footed as the sequencing relative to Trump 1.0 had been flipped. This culminated with the second fastest 20% decline from an all-time high in history behind only the pandemic. Liberation Day pretty much marked the highwater mark for tariffs (for now) and the market low.
The 90-day reprieve was announced days later, and kick started a sharp rally off the low which has continued largely uninterrupted for the last three months. The Q1 earnings season, which started in the middle of April, was better than feared but those results were from the time period leading up to Liberation Day. Consumer-facing companies were some of the most negatively impacted. Despite the uncertainty and negative survey data the economy continues to show resilience.
At this point markets have fully rebounded and seemed to be working off the assumption that tariff rates will be far lower than what was initially released in the Rose Garden. That assumption is being challenged as President Trump began sending out letters to trading partners essentially extending the deadline for negotiations through the end of the month.
The trade overhang remains, and it will take some time until we have a better picture as to how tariffs will impact the economy. However, the passage of the Big Beautiful Bill has removed the prospect of a big tax increase or a government shutdown as the debt ceiling has been extended. The government will continue to run large fiscal deficits for the foreseeable future which will continue to support economic activity and the acceleration of expenses for investment in equipment and R&D should help to drive an increase in business investment.
Data compliments of FactSet Earnings Insight as of January 10, 2025
Q1 Review
2025 Q2 EPS Est. +4.8% YoY
Q2 Revenues Est. 4.2% YoY
Capital return programs - Data compliments of S&P Global
Q1 buybacks up 20.6% QoQ to $293.5B, exceeding the previous record of $281B in Q1 2022
The Q1 earnings season began shortly after the peak of the tariff turmoil so it was not shocking that the number of companies in the S&P 500 citing “uncertainty” on conference calls hit the highest level since the pandemic according to FactSet’s John Butters. By the numbers it was a pretty strong reporting season with EPS up 12.9% YoY ahead of the 7% estimate. Q1 was largely B.T. (before tariffs) so this was not too surprising. However, market sentiment was very negative coming into the reporting season with some expectation that companies would begin pulling guidance. However, in fact only 8 companies in the S&P 500 withdrew guidance and only 15% of the 251 that provided guidance cut it. Management teams also did a good job of restoring some confidence highlighting increased preparedness in the wake of the pandemic, discussing operational initiatives and laying out other mitigation efforts.
As we head into the Q2 reporting season the trade uncertainty remains. After a round of negative revisions at the start of the quarter, estimates have stabilized along with the overarching sentiment. Economic data points to a pull forward of demand over the last couple of quarters, which may have been a tailwind during Q1. That dynamic may still be at play during Q2 to a lesser extent and it is still too early to see the ultimate impact of tariffs.
When looking beneath the surface of the index level earnings it is clear there are some haves and have nots. Tech continues to be the standout with mid-teens YoY earnings growth and only modest negative revisions from the start of the year. The qualitative commentary coming from the industry over the last few months has continued to be very positive, helped by the insatiable AI-related demand.
The largest negative revisions are occurring in cyclical and consumer facing sectors which are most exposed to tariffs. With the progression of news flow during the quarter I won’t be surprised if management teams suggest there was some improvement sequentially. understand evolving demand dynamics.
Margin preservation will once again be the hot topic. Last quarter net profit margins came in ahead of estimates at 12.7% (vs. 12.1%) but is expected to fall back to 12.2% this quarter which is inline with the average over the last year and above the 5yr average (11.8%). The build up of inventories will likely help to offset some of the pressures in the near-term while other mitigation measures and price increases are put into place suggesting that any compression will play out gradually over time. Large companies tend to be better positioned to deal with these challenges, which along with the heavier weighting of technology, helps to explain the relative resilience of S&P 500 earnings estimates. How companies manage supply chains, inventories and plans for pricing are all areas of interest.
Financials are the first out of the gate and given their unique vantage point commentary will be important. Investors will be listening closely for perspective on consumer spending and credit trends. There is some hope that loan growth could begin to pick up though mortgage activity remains depressed. The trading businesses likely continued to perform well, and capital markets activity improved in the back half of the quarter. It will also be interesting to hear management teams talk about potential changes to the regulatory environment, tokenization and the potential impact of stablecoins.
Multinationals are in the cross hairs with the implementation of protectionist policies. Within the S&P 500 Info Tech, Communication Services and Materials all have ~50% of their revenue coming from international markets. The weaker USD could be a tailwind helping to offset weakness related to any anti-American sentiment in consumer goods overseas.
Q1 shareholder return programs hit a new record driven by a big rebound in share buybacks as companies took advantage of the market weakness. Q1 repurchases jumped 20.6% to $293.5B exceeding the record set in Q1 of 2022. The largest increases were in financials, info tech, comm services and industrials. Consumer discretionary and staples both declined. As prices have recovered quickly it would not be surprising to see a pullback in activity in Q2.
Based off a recent commentary the demand for AI-capex remains robust. As we are now a couple of years into this investment cycle investors will increasingly be looking for companies to quantiy how that investment is impacting businesses. Over the coming quarters this could help to offset some of the margin pressure we discussed above.
Management teams had a steady hand during Q1 so it seems unlikely that they will begin to set off alarm bells at this point. However, outside of some select situations/industries it’s hard to see companies raising guidance given the uncertainty. The negative sentiment and price action ahead of Q1 earnings provided for a good set up for stocks.
This time around while estimates may have been sufficiently cut for companies to clear. However, the bar from a sentiment/positioning perspective is much higher with the market back at all-time highs leaving valuations stretched again with the S&P 500 trading ~24X 2025 estimates. It’s hard enough to project earnings throughout the remainder of this year but investors will soon begin to set their sights on 2026 estimates. If some of the worst-case scenarios related to trade are averted the setup for corporate America looks positive. Earnings estimates reflect that as well with analysts looking for 14% earnings growth next year which leaves the S&P 500 trading at a slightly less demanding 21X.
It is unlikely that the Q2 earnings season will shift the overarching narrative. Hopefully, there will be some more clarity by the end of the summer. In the meantime, the lack of a market response as President Trump has turned up the volume on trade suggests investors are comfortably numb.