COLUMN-We're looking at the wrong earnings season: Mike Dolan

By Mike Dolan

LONDON, Aug 7 (Reuters) - It's easy to be impressed with the U.S. corporate earnings season that's unfolding, but you're looking at the wrong one if you're trying to identify the true impact of President Donald Trump's tariffs. The coast may not be clear until October, and even then, only partially.

With 80% of S&P 500 .SPX firms now having reported second-quarter updates, the blended annual profit growth estimate, which aggregates what's been published with forecasts for the remaining 20% of the index, is running at 12%, according to LSEG data.

That's more than twice the low-balled expectations that were baked in a month ago, when they were still being dragged down by the uncertainties related to April's "Liberation Day" tariffs - postponed of course for 90 days until this week.

Curiously, that 12% pace is exactly what was forecast for the second quarter back on January 1, which gives an impression the much-feared tariff impact evaporated in a puff of smoke despite April's turbulence.

But it's partly because very little actually happened tariff-wise in the second quarter. And frantic preparations, including import front-loading and inventory stockpiling, likely offset a lot of what has kicked in to date.

And, of course, the dominant artificial intelligence theme once again drove the performance of a handful of megacaps to flatter the index's average, with eye-watering 44% and 23% annual growth recorded in the communications services and technology sectors respectively - both above January's forecast.

And that's with less than half of the companies in these hot sectors having updated so far, with chip behemoth Nvidia's NVDA.O earnings not due out until August 27.

By contrast, the equivalent blended readout for consumer discretionary stocks was half as strong as the total, and consumer staples earnings are flatlining. And both are still below January's outlook.

What's more, energy sector earnings are running at a negative 20% annually and utility and materials sector earnings are also in the red over the past year.

As BlackRock's investment strategists pointed out this week, the $27 billion of federal tariff revenues recorded for June mean someone must be paying the levies and taking the hit - either businesses or consumers, or a mix of both.

And with an effective 18% overall U.S. tariff kicking in on Thursday, as Yale Budget Lab estimates, that tax revenue tally is only going to go up for the third quarter. What was largely an uncertainty to date is now becoming a reality.

TUG OF WAR

But assessing the overall picture requires separating out the impact of the AI theme, which is keeping the surface calm even with tariff-related undertows.

Automakers have clearly taken a whack from the trade disruption, for example, but the industrials sector that they're part of is still managing to generate 4% annual profit growth because it is also getting a lift from the AI-driven data centre buildout and the defence sector reboot.

What's more, the financials sector - which indirectly benefited from the whole tariff farrago due to the outsize market volatility and related financial trading revenues - is another unexpectedly strong performer with growth of 14%.

BlackRock describes the picture as a "tug-of-war" between tariffs and AI.

"The latter is winning so far, in our view, but getting granular views is key as companies and consumers each eat tariff costs," it concludes, saying it remains overweight U.S. stocks but continues to tread carefully, watching out for trade landmines.

When might those tariff hits show up in earnest?

Corporate guidance should clear up some of the horizon, but it too is affected by similar cross-currents.

HSBC's U.S. equity team points out that earnings revisions are moving higher for the tech and AI cohort as well as for financials and utilities. But these industries are relatively immune to tariffs, while those more susceptible - like consumer and healthcare groups - have seen their outlooks turn negative.

And while margins have held up more generally, HSBC doesn't foresee that continuing in the third quarter.

"We expect a more substantial hit in 3Q as inventories are drawn down and mitigation efforts take time," it told clients.

The trade disruption likely will take its toll on the market and the wider economy to some degree. Whether you can see it clearly on the whole is a different matter.

The opinions expressed here are those of the author, a columnist for Reuters.

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