Positive outlook amid policy shifts

Earnings season is a critical time for businesses and investors, helping gauge the health of individual companies as well as the broader economy. Although we're already in week 3 of Q4 2024 earnings season, the spotlight has been on January's Consumer Price Index reading, tariff talks, and the Federal Open Market Committee meeting. Let's dive into the key macroeconomic tends highlighted this earnings season. 

Strong earnings-per-share growth and U.S. consumer resilience 

The fourth quarter earnings season has been marked by strong performance, with 9 out of the 11 S&P 500 sectors surpassing initial sales and earnings estimates. Excluding the volatile energy sector, revenues grew by 3.2% year over year, aligning with historical expansion averages. Despite soft retail data in January, companies remain optimistic about consumer spending. Positive sentiment about the consumer on earnings calls is high, mirroring the average levels seen in 2018 and 2019. Management teams are upbeat about income growth and the overall financial health of households.   

Deregulation and business optimism   

Management teams have expressed optimism about deregulation, suggesting it could provide a boost to economic activity. However, they acknowledge that past deregulation policies under the Trump administration had limited macroeconomic impact. While deregulation may not directly lead to a significant activity boost, the improved sentiment around the economic environment is likely contributing to higher growth expectations. 

Tariffs

The start of a second trade war coinciding with the Q4 2024 earnings season has brought tariff uncertainty to the forefront. Management comments have mentioned tariffs much more frequently on earnings calls compared with the first trade war of the previous Trump administration. The primary concerns are the uncertainty surrounding tariffs and the potential to delay capital expenditures. Companies are exploring various strategies to mitigate the impact, such as passing the costs on to consumers or reshuffling supply chains to avoid tariffs. Historical data from the first Trump administration shows that the cost of tariffs was largely passed on to consumers, resulting in a one-time boost to core consumer prices. 

With the Q4 2024 earnings season overlapping with the start of Trump's second administration, discussions about the uncertainty of deregulation and tariff policies are inevitable. Despite these risks, earnings growth remains robust, and management commentary reflects a strong sense of optimism about the consumer. This combination of solid performance and positive sentiment suggests that businesses are well-positioned to navigate the current economic landscape. 

Julia Rozenfeld contributed to this article.