Out of the woods?

We are approaching the end of the first half of the year, and uncertainty keeps running high. In terms of economic growth, the first quarter was negative mostly due to a spike in imports in anticipation of Trump’s tariffs. In the second quarter imports have plummeted, as expected, so we may see a rebound in growth and not a negative second quarter as initially expected. Perhaps that’s why we’ve seen the probability of a recession recede. But are we out of the woods? Probably not. Corporate earnings are being revised down, as you can see in the chart below, which is never good. It is true that the expected growth was around low double digits, which means a revision of 3.5% is not dramatic, but it’s the biggest revision of the 5 blocks depicted below. The second note is that the big earnings growth is still concentrated in the Mag 7. For that small elite group, growth is expected to be 17%, vs 7% for the other 493 stocks in the S&P500 index. And it’s not clear at all what the net effect of tariffs will be on that group, as all of them have significant ties to China. The second round of trade negotiations are underway, and we will see if both parties are able to break the deadlock.

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