Functions for the Market
Background
US companies are putting up one of their best earnings seasons in three years on the back of robust economic growth. Still, concerns about inflation, still-high interest rates and tariffs have kept the S&P 500 stuck in neutral for the past few weeks.
The beat rate of 77.6% as of Feb. 10 was just below the three-year average of 78.4%, Gina Martin Adams, Bloomberg Intelligence’s chief equity strategist, wrote. However, only 44% of operating margins exceeded estimates, less than the 52% four-year average, she noted.
“Operating margins are the lone income statement item under notable pressure as inflation lingers,” she wrote. An uncertain policy outlook also clouded this earnings season.
US inflation last month rose by the most since March, with the so-called core consumer price index—which excludes food and energy costs—rising 0.4% in January after a 0.2% advance in December.
PRODUCT MENTIONS
President Donald Trump has outlined tax cuts and deregulation in a bid to drive US stock gains. Yet he also threatened levies on Canada, Mexico and the European Union, while imposing tariffs on China and all steel products.
“Tariffs targeted at countries—reciprocal or regular—will likely be paid by multinational companies, dampening the outlook for US stocks most among global equities,” Martin Adams wrote in a separate report.
The issue
Companies are concerned about the effect of tariffs, policy uncertainty and pressure on margins. Transcript analysis suggests machinery, automobile, technology and health care sectors are the most worried.
Despite fourth-quarter profits beating expectations, analysts cut 2025 earnings estimates for 8 of 11 S&P 500 Index sectors in the past three months. Additionally, analysts cut fiscal-year earnings forecasts 9% in the past three months for Materials and 4% for Real Estate, Energy and Consumer Staples. Consumer Discretionary and Technology saw 3% and 2% cuts, respectively.
Earnings estimates for both 2025 and 2026 have been lowered in the past three months, particularly as the trade war started in February. If this trend continues, it may begin to show up in equity strategists’ target prices for 2025.
Tracking
To track S&P 500 earnings forecast reductions:
- While in the SPX Index ticker, type “earnings estimates” in the command line and select Earnings Estimates Graph.
- The shortcut is SPX Index EEG <GO>.
- Click Show Editor at top right and delete existing periods.
- Click Add/Edit Periods and select 2025 Annual and 2026.
- Click 3M in the periodicity bar.
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