Market Outlook

March 1, 2025

Earnings Growth May Be Last, Best Hope For Share Prices

Earnings Growth May Be Last, Best Hope For Share Prices As I often point out (perhaps ad nauseum!), emotions do drive stock prices — mostly in the short term. Over the longer-term, of course, it’s fundamentals. More specifically, it’s earnings. That said, April’s extreme volatility blurred the two, and with good reason.

On the one hand, baseline tariffs of 10% (for now) on essentially all U.S. imports have consumers fretful that they’ll soon be paying more for many different goods. Though that assumption has yet to fully appear in the latest inflation data, it’s also the case that the president’s tariffs have yet to work their way through the global supply chain. Nevertheless, with CPI up 2.4 from a year ago, consumer confidence has been in a five-month tailspin. That, in turn, has contributed to this year’s selling.

As for fundamentals, I’d argue that with consumer confidence falling to Covid-era lows, that has also become a fundamental problem. So are interest rates: A 30-year fixed-rate mortgage has indeed "fallen." But its move from the start of the year to today is a barely perceptible 6.9% to 6.8%.

And now there are signs of a softening labor market. Initial claims for unemployment insurance rose by 6,000 last week to 220,000. That’s fueling some economists’ recession forecasts. So is the small decrease in the number of job openings, though layoffs don’t yet account for the 275,000 firings DOGE claims to have enacted. On that score, March’s unemployment rate was 4.2%, which is up from 3.7% at the start of the year.

And, as long as we’re focusing on the negative, housing starts fell sharply 11.4% from February to March (some of that is weather-related), while home sales dropped 5.9%. Still, the nation-wide housing shortage is still propping up real estate values, although foreclosures are ticking higher.

Normally, all these indicators would suggest that after several years of rapid expansion, the economy is merely slowing. In fact, it did, contracting 0.3% in the first quarter. But against the uncertainty of tariffs, reciprocal tariffs, and perhaps an all-out trade war with foes and allies alike, the growing cacophony of recession-predictions is easily understood.

As for the most important fundamental, earnings, the data is supportive of higher share prices this year. However, that comes with a critically important proviso: tariffs.

Based on the 36% of S&P 500 companies that have so far reported first-quarter results (and have thus far been aggregated by FactSet), 73% have reported positive earnings surprises and 64% have disclosed better-than-expected first-quarter revenue growth.

While that’s good news, the more important news is what earnings look like over the rest of the year. And that, of course, is where matters get murky

Let’s start with General Motors. While it managed to beat Wall Street’s already-diminished earnings estimates this week (first-quarter profits fell 7% from the year earlier), the market soon found solace in President Trump’s announcement that he would make further concessions to U.S. automakers. (About half of GM’s cars and trucks sold in the U.S. are assembled in Canada and Mexico.)

But what next happened is emblematic of what may lay ahead for others: citing "significant" tariff uncertainty, GM pulled its profit forecast for the rest of the year. (Volvo and Porsche have done the same.) The next day GM’s stock retreated about 5%. (Its recall of about 720,000 vehicles certainly didn’t help.)

Elsewhere, Pfizer also beat earnings estimates. But with a projected $150 million in tariff-related expenses, layoffs are in the offing and its profit-picture is now riddled with question marks.

Indeed, many U.S. and foreign companies are leaving earnings and sales forecasts unchanged, but with the proviso that everything is subject to change. Still others are adjusting their forecasts (as are Wall Street analysts) as they negotiate better pricing from their suppliers and/or attempt to pass their higher expenses onto their customers.

Even with Wall Street increasingly worried that tariffs may undermine 2025’s sales and earnings forecasts, and Main Street just as worried about higher prices, there is some hope. That may come from the president himself.

April’s end-of-month trade concessions were a clear response to "Independence Day" announcements: The more he raised them, the more share prices sank. Later on, the opposite occurred.

While the president is confident that tariffs are effective tools to reduce the trade deficit, lower income taxes, balance the budget, and reshore jobs, the markets negative reaction has not been lost on him.

In the meantime, the administration says it’s in trade talks with dozens of countries — perhaps even China. If they are constructive, much uncertainty will vanish, and the forecasts shown on page 1 may yet be realized.

— John Bonnanzio