Global week ahead: Trade tensions cloud earnings and the G20 heads south

The Q2 earnings season is set to begin with major US banks reporting, but the broader US corporate earnings outlook appears challenged. Goldman Sachs predicts S&P 500 earnings-per-share growth will decelerate sharply to 4% this quarter, down from 12% in Q1, primarily due to tariff impacts on corporate margins despite only modest price increases. In contrast, European banks have shown strong performance, recording their best first half since 1997, fueled by robust investment banking returns and M&A-driven stock rallies, potentially offering a more optimistic financial picture for that region.

Analysis

The upcoming Q2 earnings season is framed by a significant divergence in regional outlooks and mounting macroeconomic pressures. For the U.S. market, consensus estimates anticipate a sharp deceleration in S&P 500 earnings-per-share growth to 4%, a steep decline from 12% in the first quarter. According to Goldman Sachs, this slowdown is primarily driven by the impact of tariffs, which are compressing corporate margins as companies have so far implemented only modest price increases to offset higher costs. This creates what Goldman describes as "conflicting messages on the margin outlook." The initial focus will be on the major U.S. banks—JPMorgan, Citi, Goldman Sachs, Morgan Stanley, and Bank of America—which are all reporting imminently. In contrast, the European banking sector presents a more optimistic picture, having just recorded its best first half since 1997, buoyed by strong investment banking returns and M&A activity. This suggests U.S. banks could potentially benefit from similar strength in investment banking. The backdrop is further complicated by geopolitical friction, highlighted by U.S.-South Africa tensions and a new 30% tariff on the country, signaling that trade policy remains a critical and unpredictable variable for the second half.

Key Decisions for Investors

• Given the forecasted deceleration of S&P 500 EPS growth to 4% from 12% due to tariff-related margin pressure, investors should closely scrutinize corporate guidance on cost management and pricing power before adding to broad US equity positions.
• Consider overweighting European financials relative to U.S. counterparts, as European banks have reported their strongest first-half performance since 1997, potentially offering a regional performance advantage.
• Monitor the upcoming earnings reports from major U.S. banks for commentary on investment banking revenues, as this could be a key source of upside, potentially mirroring the strength seen in Europe and offsetting domestic headwinds.
• Factor in heightened geopolitical risk from ongoing trade disputes, such as the new U.S. tariffs on South Africa, as these developments can abruptly alter market sentiment and the outlook for H2 2024.