By Teresa Rivas
For most investors, the bottom line is all that matters. But that line may soon be moving lower.
Throughout much of the recent tariff turmoil, investors could comfort themselves with the fact that corporate earnings remained strong. Now, with the tariff picture darkening -- and Trump's reciprocal tariffs are higher than expected, raising recession fears -- earnings look like the next shoe to drop.
There's little clarity about tariffs other than they're likely to be bad news. "There is no tariff playbook," write Bank of America analysts in a note Thursday. Using very broad-strokes math to account for tariff-fueled cost increases and the loss of foreign sales, the analysts estimate if "trading partners respond with equal retaliatory force, reciprocal tariffs could hit current S&P 500 operating income by 32%. Just import cost inflation with no retaliation is estimated to be a 5% hit."
Somewhere between a 5% and 35% hit to earnings per share as Bank of America estimates is worrisome even on the low end. The broad range, which reflects how much uncertainty there is around the tariffs plan, is even more nerve-racking. Earnings numbers provided some comfort against the unknown. Now, those very numbers look poised to come down.
"Earnings have so far been a stalwart in this storm of stock market turbulence," writes Paulsen Perspectives' Jim Paulsen. He warns, however, that apart from Wednesday's tariff update, there are several indicators that suggest earnings "disappointments could soon exacerbate this correction."
The increasingly murky employment picture is his first concern. Unemployment has been ticking up for months, from 3.4% last April to 4.1% in February, and the number of Americans who say that jobs are plentiful has tumbled in the past two years. For nearly half a century, each time that thermometer of job availability has declined significantly, the S&P 500's earnings per share has suffered a steep decline.
That dovetails with companies' likelihood to freeze hiring as they grow more concerned about profits, Paulsen notes. In addition, the capital spending/unemployment rate ratio has been a leading indicator for every major slowdown or collapse in S&P 500 EPS since 1992 including the early 1990s, 2000-2002, 2007-2009, 2016-2017, 2020, and 2022. You have one guess as to which direction that indicator has been pointing toward lately.
Other warnings come from companies.
"Until late last Fall, companies were mostly confident in their profit outlooks," Paulsen writes. "However, since last October, the percentage of U.S. companies reporting higher or unchanged profit outlooks relative to the Wall Street consensus has worsened persistently and considerably!" Likewise, Chief Executive Magazine's CEO Survey of 1-year forward confidence has fallen off a cliff, and -- not surprisingly -- that has also accurately predicted impending S&P 500 EPS weakness.
The underperformance of consumer cyclical stocks compared with safe-haven staples is also a concerning sign for Paulsen, as is the depressed state of small business sentiment. Over the past 45 years, when small businesses have this much trouble eking out a profit, the bottom lines of large companies get hit, too.
"No single indicator is persuasive enough, but when taken collectively, these charts suggest caution when forecasting forward S&P 500 EPS estimates," Paulsen concludes.
Strategists' estimates for S&P 500 EPS will likely fall soon. At present, consensus calls for S&P 500 EPS of just over $268 for this year, according to FactSet.
Last week, Bear Traps' Larry McDonald warned that the figure could be closer to $230 when the dust settles. If that is where it ends up, the index doesn't look like it's in bargain territory, even with the recent selloff.
The last thing a beleaguered market needs is more to worry about.
Write to Teresa Rivas at teresa.rivas@barrons.com
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(END) Dow Jones Newswires
April 03, 2025 14:45 ET (18:45 GMT)
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