Headline: Tariffs Loom: Despite Earnings Concerns, Stocks Trade Near Record Highs
Body:
The stock market continues to defy expectations, trading near record highs despite the looming threat of tariffs. This resilience may stem from market optimism that any tariffs will be short-lived or less impactful than anticipated.
However, the potential consequences of tariffs extend beyond direct cost increases. They can also disrupt supply chains, increase inventory risks, and impact demand. Analysts estimate that a 5% increase in tariffs could reduce S&P 500 earnings by approximately 1-2%.
While the full impact on earnings is uncertain, analysts predict a potential 2-3% decline in S&P 500 earnings if announced tariffs remain in place. The volatility and uncertainty caused by the threat of tariffs can also have negative effects.
Despite these concerns, earnings have performed exceptionally well, with nearly two-thirds of S&P 500 companies reporting strong Q4 earnings growth. If this trend continues, it could potentially offset some of the downside impact of tariffs.
Earnings remain the dominant driver of stock prices, with a tight correlation between earnings growth and market performance. This is reflected in the historical trajectory of the S&P 500, which closely follows the path of earnings.
Tariffs also hurt the countries they are imposed upon, potentially leading to lower prices if earnings trajectory shifts.
Currently, both companies and analysts are maintaining a wait-and-see approach regarding earnings revisions. The market's continued high trading may reflect a bet that tariffs will not materialize or will be benign.
Macroeconomic Crosscurrents:
* Labor market remains strong, adding 143,000 jobs in January.
* Wage growth ticks higher, averaging 4.1% year-over-year.
* Job openings decline, but are still excessive compared to the number of unemployed.
* Consumer sentiment falls due to concerns about tariffs and inflation expectations.
* Card spending data remains strong, indicating continued consumer spending.
* Inflation pressures remain modest, with the national average gas price slightly increasing.
* Supply chain pressures ease further, approaching normal levels.
* Business investment activity remains at record levels, indicating economic strength.
* Construction spending and mortgage rates trend slightly higher.
* Office occupancy rates continue to increase, but remain below pre-pandemic levels.
* Near-term GDP growth estimates remain positive.
Outlook:
The long-term outlook for the stock market remains positive, driven by expectations of continued earnings growth. The current economy is healthy, with strong consumer and business balance sheets. The Federal Reserve's focus on supporting the labor market provides additional stability.
While risks remain, long-term investors should continue to expect economic recoveries and market resilience. The long-game investment strategy remains undefeated, offering consistent growth over time.