Trade War Tensions Tear Into Earnings

As the trade war mania continues to take centre stage, the upcoming earnings season presents an opportunity for executives to reassure investors or sound the alarms.

Stock Prices vs Profits

As investors grow pessimistic about future growth, the implementation of tariffs, the largest in over a century, has erased all the gains stemming from the anticipation of increased corporate profits under a business-friendly Trump administration. Still, businesses are expected to report rising profits for the last quarter, with S&P 500 earnings projected to grow at an annual rate of 7.3%, the seventh consecutive quarter of growth. While slower than the previous quarter, this suggests resilience in the US economy during the first quarter. Nevertheless, investors may overlook these figures despite the recent relief from the 90-day tariff pause.

Earnings offer corporate executives a communication medium to justify investor trust, but the trade war has made this task particularly challenging. The tariffs have all-around effects on different companies, snaring supply chains and even increasing recession risks, all of which point to diminishing consumer confidence. Of course, some companies are more vulnerable due to their reliance on goods imported from China, which faced 104% tariffs. Some are better positioned to pass on tariff costs to consumers, while others, a minority, may benefit as consumers seek alternative suppliers.

Benefitting in the Mayhem

Earnings season unofficially begins with the release of results from the largest banks, with the financial sector expecting earnings growth of around 2.3%. Investors will closely monitor the tariff impact on the Fed's outlook, as economists argue that even if the economy underperforms, increased consumer prices from tariffs could keep interest rates high, limiting support for stocks vulnerable to liquidity shortages, such as high-valuation tech firms that have driven market growth in recent years.

Guidance will also be critical as companies typically affirm their outlook for the year in the first quarter. But this time may be different. While earnings are expected to grow 9.6% by December, a wave of guidance cuts or withdrawn outlooks due to trade uncertainty could unnerve investors. This earnings season could either reassure investors that businesses are still performing well and recent fears are overblown, or it could confirm valid concerns and further depress stock prices.

S&P 500 V-Bottom Pattern

After a sharp sell-off following a dead cat bounce earlier in the week, the S&P 500 crashed to 4800 just to reveal a V-bottom pattern in the aftermath of the tariff postponement. Breaking past the 5500 'neckline' could open the door to 5800 and eventually the record peak of 6150. On the other hand, failing to get through either of the near-term resistance levels would suggest a period of consolidation and could lead to further declines. Near-term supports lie at 5250 and the 5000 mark.

Source: SpreadEx / S&P 500

Key Takeaways

Although corporations are expected to report rising profits, the impact of the trade war on supply chains, consumer confidence, and the rising risk of recession could prompt executives to issue alarming warnings or even cut guidance. As such, reassuring statements and maintaining outlooks for the year could stabilise the markets. But ultimately, the earnings season will be a critical test of investor sentiment amid the escalating trade tensions.