3 Things Analysts Are Watching as Earnings Season Gets Rolling This Week

The second-quarter earnings season officially begins this week, spearheaded by major U.S. banks, with analysts broadly anticipating S&P 500 EPS growth of 4.1% year-over-year. However, significant caution prevails as Wall Street analysts cut S&P 500 earnings estimates by over 4% during Q2, and tariffs are projected to reduce Q2 S&P 500 earnings by approximately 2 percentage points, with a larger impact expected in the second half. This mixed outlook highlights pervasive uncertainty surrounding trade policy and its potential drag on corporate profitability.

Analysis

The second-quarter earnings season commences against a backdrop of conflicting signals, characterized by modest growth expectations tempered by significant macroeconomic headwinds. While analysts, per UBS, forecast a 4.1% year-over-year increase in S&P 500 EPS, this projection is undermined by notable caution from Wall Street. FactSet data reveals that analysts cut Q2 earnings estimates by over 4%, a revision more severe than the 5, 10, and 15-year averages, suggesting underlying concerns about corporate profitability. The primary source of this anxiety is trade policy, with Deutsche Bank estimating that tariffs will directly reduce Q2 S&P 500 earnings by approximately 2 percentage points, an impact expected to intensify in the latter half of the year. This pressure is particularly acute for companies with concentrated tariff effects, which constitute about a quarter of the index's earnings. Furthermore, Goldman Sachs projects that 70% of these costs will be passed to consumers, introducing an inflationary variable. Reports from bellwether firms like JPMorgan Chase (JPM) and Netflix (NFLX) will be critical in providing clarity on consumer health, deal appetite, and the true impact of this pervasive uncertainty on corporate performance.

Key Decisions for Investors

• Investors should prioritize corporate guidance over historical Q2 results, focusing on management commentary regarding the expected second-half impact of tariffs on margins and pricing strategies.
• Carefully monitor earnings from bellwether companies like JPMorgan and PepsiCo for direct reads on consumer health and from Netflix and TSMC for insights into growth sector resilience.
• Consider reviewing and potentially hedging positions in companies with high international supply chain exposure, as the negative earnings impact from tariffs is projected to increase throughout the year.
• Given the larger-than-average downward revisions in analyst estimates, a cautious stance is warranted, as actual earnings that merely meet these lowered expectations may not be sufficient to drive markets higher.