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Earnings season is here: the next big test for shaken markets
Jacob Falkencrone
Global Head of Investment Strategy
Key points:
- Sharp earnings downgrade: Analysts have cut first-quarter earnings growth forecasts significantly—from 11% at year-start to just 6% now—highlighting deepening economic fears amid Trump's historic tariff hikes.
- Forward guidance is critical: Investors should closely watch corporate outlooks and guidance as companies navigate unprecedented uncertainty, inflation pressures, and consumer pessimism.
- Investor positioning matters: Defensive sectors like Healthcare and may offer stability, while cautious investors should prioritise quality companies with strong pricing power and resilient earnings.
No rest for the wicked—markets remain rattled, uncertainty looms large, and first-quarter results may (hopefully) offer the clarity investors desperately seek.
Just days ago, Donald Trump's historic tariff hikes—the steepest in over a century—sent stock markets plunging dramatically, wiping out about trillions of dollars in just a few days after his April 2nd announcement. However, on April 9th, Trump unexpectedly announced a 90-day pause on his additional tariffs for countries open to negotiations—while dramatically increasing tariffs on China to a staggering 125%. The news sparked an extraordinary rally, with the S&P 500 surging 9.5% and the Nasdaq soaring 12%, marking the best single-day gains since the 2008 financial crisis.
Despite this relief, uncertainty still looms. Trump’s climbdown was partial, specifically excluding China, and investors remain wary that tariff tensions could flare again once the pause ends.
This earnings season will now be even more closely watched as companies reveal their first-quarter results amid a highly volatile economic backdrop. But as before, it’s not the past results that matter most—it’s how business leaders guide investors about the uncertain future.
Why this earnings season is crucial
Wall Street entered 2025 optimistic, expecting an earnings growth acceleration of around 11% for the first quarter compared to last year. But reality quickly set in. Data from Bloomberg shows, that today, the consensus forecast has been sharply revised downwards to just 6%—a significant drop and much larger than the average downward revision we typically see.
This dramatic revision isn’t just another small adjustment. It signals deepening concerns about the economy, consumer spending, and corporate profitability in the face of rising tariffs, persistent inflation, and deteriorating consumer confidence. Investors should pay close attention, as corporate results will help clarify whether current fears are exaggerated—or if the worst is yet to come.
What investors should watch closely
As you follow this earnings season, these areas deserve your special attention:
1. Pricing power and profit margins
Trump’s tariffs are raising companies’ costs significantly. Investors should focus on whether businesses can pass these higher costs onto consumers. Companies with strong brands or dominant market positions are better positioned to preserve their profits.
“Watch closely for signs of margin pressure. Businesses unable to raise prices might face significant earnings headwinds.”
2. Sales and demand outlook
Consumer confidence has turned sharply negative in recent months due to trade policy fears, harsh winter weather, and recent stock market turbulence. Wealthier consumers—often sensitive to stock market movements—have noticeably pulled back their spending.
“Listen closely for any cautious comments on consumer spending. A sudden drop in sales guidance could indicate deeper economic troubles ahead.”
3. Investment and hiring plans
Look at companies' capital expenditures and hiring intentions. Companies uncertain about the future often reduce their investment and hiring, warning signals of broader economic slowdown.
“Watch corporate announcements carefully. Cuts in investment or hiring often signal management concerns over future growth.”
Forward guidance: clarity or more confusion?
This earnings season will be less about past results and more about management’s outlook. Given Trump's recent reversal and the continued threat of high tariffs on China, visibility remains low. Companies might refuse clear financial forecasts altogether, citing uncertainty around tariff developments and global trade disruptions.
“Forward guidance isn’t just about numbers—it reflects management’s confidence. This quarter, expect cautious guidance—or even no guidance at all—as companies face unprecedented uncertainty.”
Sector outlook: who wins, who loses?
The impact of tariffs and consumer uncertainty will vary significantly across sectors:
- Consumer discretionary and industrials are among the hardest hit, with downward revisions of around 10% in expected earnings.
- Materials and energy sectors also face significant pressure due to lower commodity prices and rising costs.
- Conversely, the healthcare and technology sectors appear to be better positioned, with the highest projected earnings growth rates for Q1.
Retail investors should carefully consider sector positioning, focusing more heavily on sectors less exposed to tariff risks.
Can earnings season spark optimism? Or add more risk?
Despite recent market relief following Trump’s tariff pause, this earnings season could provide further optimism—but also carries increased risk. If corporate America demonstrates resilience and provides reassuring guidance, the rally may strengthen, turning recent volatility into opportunity. Analysts currently predict earnings growth of around 8% for Q2 2025, slightly higher than Q1, but the trajectory remains highly dependent on the uncertain path of tariffs, particularly with China, and the broader economy.
However, investors must remain cautious: if companies fail to convincingly outline strategies to withstand tariffs and maintain profitability, investor anxiety could quickly resurface, potentially triggering renewed declines. Investors should brace themselves for continued volatility, carefully interpreting management comments this earnings season.
How investors can navigate the turbulence
Here’s how to position yourself smartly:
- Cautious investors: Prioritise stable, high-quality companies with strong balance sheets, predictable cash flows, and solid dividends—particularly in defensive sectors like Healthcare and Utilities.
- Risk-tolerant investors: Consider selectively buying high-quality names unfairly punished by tariffs and sentiment swings—provided the long-term business fundamentals remain sound. But avoid aggressively chasing momentum, as the tariff pause could prove temporary.
Above all, remain disciplined, avoid panic selling, and use this earnings season as an opportunity to assess the strength of the companies you own.
The market's moment of truth
Markets vote with emotions in the short-term, but fundamentals weigh in eventually. Trump’s tariff reversal triggered an unprecedented relief rally—but this doesn't signal an “all-clear”. As legendary investor Benjamin Graham said: “In the short run, the stock market is a voting machine—but in the long run, it’s a weighing machine.”
This earnings season is your chance to weigh the facts carefully, navigate through uncertainty, and set your portfolio’s course through a still-turbulent tariff storm. Buckle up: earnings season is here, and it promises to deliver clarity—one way or another.