Navigating the Earnings Landscape: Challenges and Continued Growth
As we move through 2025, the earnings landscape for the S&P 500 has shown some signs of downward pressure, yet growth remains evident. Initially, market analysts were optimistic, predicting steady earnings per share (EPS) growth driven by technological advancements and consumer confidence. At the start of the year, many had forecasted EPS growth around 15-16%, reflecting strong corporate performance and favorable economic conditions. However, at Commerce Trust, we anticipated a more modest 9-12% growth, taking into account our projections for real GDP growth, inflation, and profit margins. Unfortunately, external factors, including trade uncertainties and tariff policies, have begun to reshape these expectations.
The Impact of Tariffs and Demand Shifts
One of the biggest challenges has been the imposition of tariffs on key imports and exports. These tariffs are expected to disrupt supply chains, increase raw material costs, and compress profit margins for businesses involved in international trade. Sectors that rely heavily on global supply chains, particularly manufacturing and consumer goods, are feeling the brunt of these tariffs.
Additionally, there is concern that consumers may pull forward their purchasing behavior. By buying products sooner to avoid price hikes caused by tariffs, they could inadvertently reduce demand in the second half of the year. This “demand pull-forward” effect may further weaken consumer spending as prices rise and economic uncertainty persists. The result could be a slowdown in corporate spending and investment, which is typically seen in times of economic uncertainty.
Key Sectors to Watch
Certain sectors are more vulnerable to these changing dynamics. The technology sector, for example, is heavily reliant on semiconductors, which are essential for electronics and artificial intelligence. As tariffs on semiconductors increase, the sector faces higher costs and potential delays. While first-quarter earnings were strong, they did not yet fully reflect the impact of these new tariffs, which could affect earnings in the coming quarters.
Similarly, the defense sector has seen the effects of higher manufacturing and raw material costs. However, changes in manufacturing processes for more efficient production could lead to improved earnings as the year progresses.
The Impact of a Weaker Dollar
Another factor influencing earnings in early 2025 is the weakening U.S. dollar. When companies sell goods and services overseas, the weaker dollar allows them to convert foreign revenue back into U.S. dollars at a more favorable exchange rate, increasing their earnings. This is particularly beneficial for U.S. companies in sectors like technology, which have substantial international sales.
Growth Still on the Horizon
While the market faces challenges from tariffs, demand fluctuations, and currency movements, there is still room for growth. The manufacturing, consumer goods, and technology sectors are particularly impacted by these factors, but opportunities for growth remain. As we move through 2025, investors are likely to start looking at 2026 EPS expectations to better assess the market’s long-term value.
Despite the setbacks, the outlook for continued growth is still present, although the path forward may be more gradual than initially anticipated. As economic conditions evolve, so too will corporate earnings, and there is potential for market recovery as we head further into the year.
