Is it really just the earnings, stupid?*
*in which “stupid” is a reference to the author.
The major bounce-back in US stocks that started with tariff relief has received a welcome fundamental boost during this reporting period.
Ahead of Q1 results, I hypothesized that this earnings season wouldn’t really be about earnings. It would be about tariffs: whether companies saw a rush of activity from customers trying to beat the imposition of levies and how their outlooks had changed in light of the upheaval to trade — if they deigned to even offer an outlook at all.
Q1 results, in other words, had the potential to be a bit of a head-fake about a world that was no longer going to exist.
And, well, there is some support for that thesis. Companies that do well aren’t seeing their stocks soar, by and large, perhaps because of that aforementioned line of thinking or because the solid results came along with underwhelming guidance.
“Companies which have beaten on both EPS and sales have outperformed the S&P 500 by 0.2ppt the following day, well below the historical average of 1.5ppt — suggesting 1Q results matter less amid looming uncertainty over tariffs/the macro and the potential impact on the rest of the year,” wrote Savita Subramanian, head of US equity and quantitative strategy at Bank of America. “Misses have underperformed by 3.9ppt the subsequent day, more than the historical average of 2.5ppt.”
But that may be missing the forest for the trees here when it comes to telling another simple story about earnings season: it’s been really good!
In aggregate, earnings have surprised to the upside by a colossal amount.
So far, profits per share have exceeded expectations by a whopping 9.3% among S&P 500 companies that have reported, per Bloomberg data.
That’s the best in at least the past couple years, and contrasts wildly with what analysts had been doing in a frenzied fashion ahead of earnings season: chopping estimates more often than they had since Covid.
Sales, it should be noted, are exceeding expectations by much less than earnings. What this tells us is that companies were great at managing margins (yet again!), maximizing their earnings for every dollar of sales. This may become a challenge in the event that tariffs push input costs materially higher.
But markets are always (supposedly) forward-looking. And what they seem to be looking forward to is a world where tariffs aren’t as high as traders would have feared a few short weeks ago, they might be going down even more, and Corporate America is in a much better starting position than previously thought to grapple with whatever awaits.
On the other hand, the fact that the S&P 500’s best performer since the April 8 lows by a considerable margin is Palantir — a company driven more by retail enthusiasm than staid reevaluations of the discounted value of its projected future cash flows — does seem to severely undercut purely fundamental-based explanations to unpack the market move. As does the stronger recovery for the iShares MSCI USA Momentum Factor ETF compared to baskets of the most tariff-affected stocks.
Oh well, we tried.
