I was probably too chubby to be caving, but my high school buddies wanted to go. Across the road from the little white church we attended was a big, beautiful cave. One day in high school, we set out crawling on our stomachs in shallow water, and the whole time, I was thinking about the risk of the path getting too narrow up ahead. In many ways, the companies we invest in feel the same way; things are good, but they worry about how tight things might get soon.
Earnings season is underway, and we are learning how corporations performed last quarter. During this earning season, the real focus won’t be on the previous quarter’s numbers but on the individual companies’ 2025 forecasts will be affected by the new administration’s regulation, trade, and immigration policies. Policy changes will have a lot to do with the earnings upside in 2025. With high stock prices, corporate America needs to show confidence that it can be profitable in this new political environment.
The new trade policy is anyone’s guess.
Analysts will perk up on every earnings conference call when the topic of trade policy and tariffs is discussed. This is because, though the S&P 500 index is made up of American companies, these companies are big multinational corporations that will be affected by tariffs. While tariffs won’t impact last quarter’s earnings, they will shape all of 2025’s earnings. Since tariffs can be raised with a presidential executive order, they can be implemented immediately without congressional approval. It is anyone’s guess as to when, how big, or how wide the tariffs will be, but they will squeeze on profit margins for those companies that import materials and unfinished goods from overseas.
There is some risk of short-term inflation if some of those tariffs are passed on to consumers by raising prices. If 2018 (Trump 1.0) is a guide, foreign manufacturers and US wholesalers will absorb much of these tariffs instead of US consumers. Time will tell if these tariff threats are real or merely for trade negotiations. Regardless, there is significant trade uncertainty, as is the potential for foreign governments to retaliate against US goods.
Optimism.
I believe corporate America will be able to deliver double-digit earnings growth in 2025. Though there is a lot of unknown, corporate earnings will be pushed by continued investment in artificial intelligence (AI), the productivity gains AI will bring, and effective cost controls. Not only that, but banks and energy companies should get a bump from expected deregulation and potential policy support from the new administration. I expect strong numbers this earnings season, but everyone knows a new era has begun. While we appreciate how well our investments did last year, the focus is on policy, especially trade policy, regarding 2025 earnings.
Though I had played around the mouth of that cave several times as a kid, I had never been to the back of it. I had a real fear that I would get stuck or have to shimmy back out. The one hope I had was that I knew several of my family members had been here before me, which gave me confidence that I could make it, which I did. There are a lot of unknowns in the financial world right now, but there is significant hope because these markets have worked with this administration before.
I still love that cave.
Have a blessed week!
Securities and advisory services are offered through LPL Financial, a registered investment advisor and member of FINRA/SIPC.
Opinions voiced above are for general information only & not intended as specific advice or recommendations for any person. All performance cited is historical & is no guarantee of future results. All indices are unmanaged and may not be invested directly.
The economic forecast outlined in this material may not develop as predicted & there can be no guarantee that strategies promoted will be successful.
Fervent Wealth Management is a financial management and services entity in Springfield, Missouri.
