Earnings Season: Tariffs, AI Spending, and Labor Market Under Scrutiny
Source: finance.yahoo.com
As corporate earnings season kicks off, Wall Street is laser-focused on key themes that could make or break market sentiment. Trade tensions, AI investments, and the strength of the labor market are all under the microscope.
Elevated Expectations
The S&P 500's impressive 11% year-to-date surge has set a high bar for companies. Analysts predict a solid 7.4% profit growth for US stocks in the third quarter. This leaves little room for error, according to CFRA's Sam Stovall.
Tariff Impact
Escalating trade tensions, particularly with China, are back in focus. Deutsche Bank estimates that S&P 500 earnings growth would have been a full percentage point higher without tariffs. Investors are now demanding clarity from companies on how tariffs affect their bottom lines, according to US Bank.
AI Spending
Despite trade uncertainties, companies are heavily investing in artificial intelligence. UBS forecasts a 67% surge in global capital expenditures this year alone, reaching $375 billion. JonesTrading's Mike O’Rourke warns that a slowdown in AI spending could trigger a significant market correction.
Labor Market Worries
Concerns about a weakening labor market are growing, especially with recent government shutdowns hindering the release of key employment data. Robert W Baird & Co.'s Ross Mayfield cautions that rapid job cuts could dampen consumer spending and affect retailers and restaurants.
Currency Tailwind
The dollar's relative weakness compared to last year benefits US corporations. It makes their exports more competitive, says LPL Financial's Jeff Buchbinder. He believes this could boost earnings by 5-7% in Q3. European exporters, however, may face headwinds due to a stronger euro, according to Panmure Liberum.
China's Outlook
Investors are also closely monitoring Chinese companies amid global trade tensions. While China's CSI 300 stock index is up 17% year-to-date, profit expectations remain modest. Union Bancaire Privee suggests that government efforts to curb price wars could improve earnings sequentially.