LIVE MARKETS-Waiting for earnings and tariff impact

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WAITING FOR EARNINGS AND TARIFF IMPACT

With the wait continuing for clarity on U.S. trade policies a week ahead of the second-quarter earnings season, UBS economic and market experts discussed the lay of the land with reporters this week.

While it’s still not clear how it all shakes out ultimately, Jonathan Pingle, chief U.S. economist at UBS Investment Bank said that the U.S. has gone from a weighted average tariff rate of around 2.5% at the start of the year to about 16%.

He noted "a lot of noise" due to the pull forward of imports but, even with that, "the economy was what was cooling somewhat, and now we're looking at a second half where we would expect the tariffs to start to pose a more material headwind to economic activity."

Nadia Lovell, senior U.S. equity strategist, UBS Global Wealth Management said it appears that "investors are believing that there will be some sort of trade framework in principle that will be made with our key trading partners."

And while the August 1 deadline, announced by President Trump this week buys countries more time to negotiate, "there's risk that reciprocal tariffs with the major trading partners could reverse back to at or around the April 2 levels." That would represent a headwind she notes but, 'for now, markets are willing to sort of look through this risk."

"That makes sense on some levels, because it has been a winning strategy," said Lovell. "Over the last couple of months, we've seen the administration escalate, only to quickly de-escalate. This could also just be another tactical escalation in some way."

Starting next week, investors will focus on earnings and look for “insights on how companies are adjusting to and handling the increase in tariff rates," she said.

Lovell notes that the bar is low heading into earnings season with estimates suggesting slowing growth. And with sales estimates roughly in line with the first quarter, Lovell sees much of the slowing from a hit to margins.

For the first earnings season since the initial tariff announcements on April 2, analysts are forecasting a slowdown in second-quarter earnings growth of 5.8% year-over-year versus 13.7% growth in the first quarter, according to LSEG data.

Even as companies navigate tariff uncertainty Lovell says they will likely beat the consensus estimates for Q2 noting that some companies that reported earnings early have beaten estimates, "so we could see earnings growth come in at the high single-digit range for the quarter."

However, "given the strong rally that we've seen over the last couple of months, some of this is likely priced in" so on the index level "reactions to beats are likely to be more muted than we have seen in prior earnings seasons," she said.

So with this in mind Lovell favors sectors like technology .SPLRCT, communications services .SPLRCL, financials .SPSY and utilities .SPLRCU in particular, "where we do think that you're going to see more relative upside versus the broader market."

(Sinéad Carew)

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