Stock market’s rally now hinges on earnings – with tariffs and Fed drama hopefully background noise

By Frances Yue

There’s a feeling of optimism about the week ahead, with corporate earnings finally poised to hold the spotlight

There’s a feeling of optimism in the U.S. stock market about the week ahead – with corporate earnings finally poised to hold the spotlight, despite simmering concerns about President Trump’s tariffs and his pressure campaign against the Federal Reserve.

Not only is Big Tech on deck, but another extremely important aspect of this earnings season is about to grip the stock market, especially with the S&P 500 SPX and the Nasdaq Composite COMP trading near record highs, noted Thomas Hainlin, national investment strategist at the U.S. Bank Asset Management Group.

“Earnings seasons are always important, but this is the first one that we get some information about how companies are responding [to] or dealing with tariffs,” Hainlin said in a phone interview.

Trump already implemented a minimum 10% tariff on all countries take took effect April 5 – aspects of which should start being reflected in the way corporate executives talk about earnings and their outlooks.

The president vowed to impose even higher tariffs on Aug. 1 unless more trade agreements emerge. But investors caught off guard by his early tariff pauses, which saw subsequent rallies for stocks, seem unmoved by the latest threat.

The Dow Jones Industrial Average DJIA lost 142 points, or 0.3%, on Friday, and ended 0.1% lower on the week. The S&P 500 was down fractionally on the day but ended the week up 0.6%, while the Nasdaq Composite also rose fractionally Friday to book a record close and a 1.5% gain for the week.

Read: The stock market isn’t waiting around for Aug. 1 to decide if tariffs will hurt consumers

Fresh earnings estimates

Despite three months of higher tariffs, many analysts anticipate second-quarter earnings will exceed expectations, providing a key pillar of support for the market’s rally.

So far, earnings appear to have kicked off on a positive note. Of the 53 S&P 500 companies that have reported as of Friday (representing 11% of the index), 85% have topped analyst estimates, with a median beat of 4%, according to Fundstrat. Among the 13% that missed expectations, the median shortfall was 3%.

Most of the banks that kicked off earnings season last week delivered strong results, surpassing analysts’ estimates, said Anthony Saglimbene, chief market strategist at Ameriprise Financial.

Trading revenue at several banks including Goldman Sachs Group Inc. (GS) and Bank of America Corp. (BAC) came in higher than expected, as they capitalized on heightened volatility in the second quarter, Saglimbene observed. The results also reflected a resilient consumer and healthy business activity, he added.

Looking ahead, Michael Arone, chief investment strategist at State Street Investment Management, said he expects the majority of companies reporting earnings to exceed expectations. He forecasted second-quarter earnings growth to come in at around 9% on a yearly basis, well above current estimates. If his expectation comes true, it would “be enough to continue [to drive] the rally,” Arone noted.

As of June 30, analysts projected S&P 500 earnings to grow 4.9% year over year in the second quarter, according to FactSet. That estimate was revised up to 5.6% as of July 18. Even so, if earnings land at that level, it would mark the lowest earnings growth for the index since the fourth quarter of 2023, per FactSet.

Tariffs, Trump and Powell

Still, not everyone is convinced the path forward looks smooth, with stocks still vulnerable to tariffs, developments in the artificial-intelligence industry and growing concern about the Federal Reserve’s independence.

“I don’t know if companies, especially those that would be more negatively impacted by tariffs, are going to go out on a limb and say, ‘Hey, everything’s alright, and we’re going to provide solid guidance for more visibility into the rest of the year,” Saglimbene said.

“I think what we’re likely to see is more guarded outlooks, which is OK if we get Big Tech kind of confirming analyst expectations for the third and fourth quarters. And if we get that, then I think markets can grind a little bit higher,” he added.

With Big Tech earnings, investors will pay particular attention to the amount of spending on artificial intelligence, noted U.S. Bank’s Hainlin.

For the coming week, Coca-Cola Co. (KO) is due to report earnings on Tuesday. Google parent company Alphabet Inc. (GOOGL) (GOOG), Tesla Inc. (TSLA), T-Mobile US Inc. (TMUS) and AT&T Inc. (T) are scheduled to release financial results on Wednesday. Intel Corp. (INTC), Blackstone Inc. (BX), Deutsche Bank (DB) and Nasdaq Inc. (NDAQ) will be reporting on Thursday.

Beyond earnings, other risks continue to hang over the market, including Trump’s early August tariff deadline.

“The bigger risk to this rally will come from the potential for threatened tariffs to become the reality. Again, it’s not my base case, but I think that that poses a risk if trade negotiations don’t progress forward,” said State Street’s Arone.

Arone has longer-term concerns that the Fed might be too restrictive in its monetary-policy stance, causing further slowing of the economy.

In a related vein, stocks, bonds and the dollar sold off sharply on Wednesday after a Bloomberg News report said Trump was planning to soon fire Fed chair Jerome Powell. Stocks quickly rebounded after Trump told reporters at the White House that he had “no plans” to remove Powell.

Beyond events in Washington, the market also could be due for some seasonal weakness. August and September are historically the worst-performing two-month period for U.S. equities, according to Ameriprise’s Saglimbene.

Also read: The stock market’s summer rally is going strong. But here’s what can happen next.

-Frances Yue

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

  (END) Dow Jones Newswires

  07-20-25 1200ET
Copyright (c) 2025 Dow Jones & Company, Inc.