Trump’s tariffs have thrown markets into chaos, but how will US earnings season be affected? Ian Whittaker lays it out in today’s Notebook
Tariffs leave firms with prisoner’s dilemma amid US earnings season
The thunderbolt that was the Trump Administration’s steeper than expected tariff plans has played havoc with the markets, but the rubber will hit the road with Q1 results season. We have already had a taster of things with Blackrock CEO Larry Fink saying that the US may be very close to, if not already in, a recession while JP Morgan’s CEO Jamie Dimon said its Q1 results last week that there was a 50-50 chance of recession. The Q1 results themselves will not be impacted by the impact of tariffs given the announcement came after the end of (most) companies’ reporting period. But analysts and investors will be looking for the nuances in every comment and statement – even more so than usual – as to the impact on company earnings. So, what should we expect?
Certainly, from an analysts’ perspective, the expectation is of dramatically lowered earnings growth. According to Bloomberg Intelligence, earnings growth expectations for the S&P 500 for 2025 now stand at 9.4 per cent, versus 12.5 per cent at the start of the year. Things were already looking gloomier anyway, especially for firms that were significantly exposed to the Chinese market. Now, with the prospect of a sustained trade war in sight, that gloom is set to increase.
However, it is an interesting question as to how corporates will react to the question of tariffs. The expectation, at least amongst a large proportion of the financial markets, is that companies will start to lower their estimates for the full year. That may happen but there are reasons for thinking that most companies will hold off – for now.
The first is the sheer volatility of the President in his decision making which means that what can be a decision one day can be reversed the next. Over the weekend, the Trump Administration stated that smartphones and computers were exempt from the tariffs but then “clarified” the exemption was only temporary. Or take the pharmaceutical industry, which was exempt from the tariffs announced on 2 April but where President Trump announced a week later that tariffs would be coming. How to plan in a scenario when no one knows what will happen in the next few weeks?
The second is the potential for other countries to strike deals. The Administration stated when it announced a pause on the tariffs that more than 75 countries want to negotiate on the tariffs. It could be the case that, for many countries, there may be progress relatively quickly especially as many of Trump’s concerns are non-economic, such as defence spending by other countries.
The third is what could be growing political pressure on the Administration from Republican politicians to scale back on the tariff plans either because of the economic or – for many – potential electoral impact. Seven Republican senators have expressed support for Congress to take back control of tariff policy and Senator Ted Cruz has suggested the Republican party faces a potential “bloodbath” in the 2026 Midterm elections if the issue causes pain to consumers.
All three of the above have a common theme at play – namely that trade policy can change quickly and that companies making medium and longer-term decisions now may face being overtaken by events. That means they may decide to take shorter-term action instead (e.g. temporary pauses on advertising spend). Corporates also will be aware any downbeat or negative comments – either about the economy in general or the impact caused by tariffs – risks the ire of the Administration and, more consequentially, seeing a direct or indirect, impact on their businesses. For many CEOs and CFOs, caution may be the key.
Corporates therefore face a version of the prisoner’s dilemma – do they take action now and be ahead of the curve or hold back and wait for others to make the first move, which may mean they are left behind. Whatever happens, the Q1 corporate season is going to be very interesting.
Quote of the week
“I know what the hell I’m doing.”
Donald Trump at a Republican fundraising event in Congress. Hopefully he does.
Netflix knows not to get hung up on metrics
The so-called ‘Quantification Fallacy’ highlights the point that relying on metrics generally leads to a poor outcome. Most importantly, metrics are not a strategy, nor do they define what should be the wider aims. It is the same in the television streaming world. The biggest underlying problem of the traditional US media companies is they set their goals in terms of metrics (e.g. “reach 250 million subscribers”, “make streaming profitable”). Conversely, the likes of Netflix and Amazon have been much better at defining what their strategy and end goals are, hence their ruthless acquisition of sports rights in the United States and global expansion. If you let metrics guide your policy, it is likely you will fail.
Media M&A goes quiet
The Trump Administration had ushered in hopes of an explosion of M&A activity, and the media sector was one of those hoping to benefit from an expected boom. However, I think of all the sectors involved, media is probably one of the least likely to benefit from a M&A boom. Put simply, the Trump Administration sees Hollywood, and the industry in general, as a bastion of support for the Democrats. I’m not sure why anyone would think he would allow firms he sees as hostile to become more powerful by allowing consolidation.
A recommendation
The power of small changes in habits. We all like to think that it is grand sweeping changes that bring the most benefit but actually I have always found small incremental additions pursued constantly have the greatest effect.
Ian Whittaker is the founder of Liberty Sky Advisors and twice City AM analyst of the year