The S&P 500 Index is on the cusp of a record high but with earnings season just weeks away, the foundation of the rally is about to get a major test.
With tariff headwinds still a concern, Wall Street sees profit growth of 2.8% year-over-year for the second quarter for the benchmark, according to data compiled by Bloomberg Intelligence. That would be the smallest jump in two years. Adding to the concern, only six of the 11 S&P 500 sectors are projected to post a bump in earnings, the fewest since the first quarter of 2023, estimates compiled by Yardeni Research show.
The lackluster forecasts magnify warning signs that are piling up about the sustainability of the equities rally. Some market watchers are cautioning that valuations are looking lofty, and that the S&P 500 would need an earnings boom or drastic Federal Reserve interest-rate cuts to justify current levels. Technical analysts, meanwhile, see the index potentially declining in coming months unless more sectors join the rally.
“There’s definitely a risk for the stock-market rally,” said Sarah Hunt, chief market strategist and partner at Alpine Woods Capital Investors. “Earnings are a big driver for the market and one of the biggest questions now is if the deterioration in some sectors will be worse than the acceleration in other sectors.”
The potential impact of global tariffs is a big reason estimates for the upcoming earnings season that starts in mid-July are gloomy. Companies are already starting to issue warnings: Earlier this week, FedEx Corp. said that its profit would be worse than expected this quarter and declined to offer guidance for the rest of the year, citing an “uncertain global demand environment.” General Mills Inc. echoed the concern, projecting a lower adjusted profit as value-seeking consumers feel pressured by tariffs, conflicts around the world and shifting regulations.
Energy Laggard
Analysts see the energy sector posting the biggest second-quarter earnings contraction: -25.5% year-over-year, according to data compiled by Yardeni Research. For the first time in 10 quarters, the consumer-discretionary sector — made up of companies whose goods or services people buy with disposable income — isn’t expected to post earnings growth, the data showed.
“The consumer is broadly cooling as the labor market softens, tariff uncertainty rises, and the last gasps of the post-Covid revenge spending boom peter out,” wrote Ross Mayfield, investment strategist at Baird.
But some, like Ed Yardeni, president of Yardeni Research, say analysts are being too conservative with their estimates for the upcoming earnings season.
“In fact, in recent weeks, they stopped cutting estimates and I wouldn’t be surprised if they start raising them,” Yardeni said. “They’re already becoming more optimistic about 2026.”
Sam Stovall, chief investment strategist at CFRA, adds that companies have been doing a good job managing expectations, and that could mean some weakness in earnings has already been priced in.
Still, even strong quarterly figures may not be enough to offset worries about tariff uncertainty. Despite better-than-expected earnings results in the first quarter, companies across the US — and even Europe and China — had pulled their forecasts for the year or had provided grim outlooks, citing rising costs, weak consumer sentiment and a lack of business confidence because of trade tensions.
A June survey of 169 CEOs by the Business Roundtable showed a downward shift in expectations and plans for the next six months since the dust on tariffs hasn’t settled yet. Investors’ concerns may only be assuaged once companies offer details on how they’ve handled trade-related turmoil in April and May.
“Companies still are not clear about the impact of tariffs and more firms guided their 2025 outlook lower as it’s hard for businesses to realize the cost impact, which could potentially hurt their margins,” said Wendy Soong, equity strategy data analyst at Bloomberg Intelligence.
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