Q3 Earnings Season Preview: Little Suspense

Don’t Expect Much Suspense This Quarter

Earnings season is usually predictable quarter to quarter in the absence of economic inflection points. We would suggest the second quarter was more of an inflection point than the third as tariffs ramped up in a meaningful way and companies’ visibility into tariff costs improved. The effective tariff rate ended July at 9.7%, up slightly from below 9% at the end of June (source: Bloomberg). We think another three to five points of tariffs will likely be added on to July levels to land at an overall rate between 12% to 14%, but the Supreme Court will determine how quickly we get there. The nation’s highest court is expected to rule on the legality of the Trump administration’s tariffs imposed under the International Economic Emergency Powers Act (IEEPA) within the next few months. So, with less suspense around tariffs, economic growth that could approach 3% for Q3, the continued surge in artificial intelligence (AI) investment, and a roughly 5% drop in the average level of the U.S. dollar from the prioryear quarter, corporate America has an excellent opportunity to post another low-teens earnings growth rate for the S&P 500. The 8% upside produced last quarter may be too much to ask for, but a 5% beat seems like a reasonable expectation.