Daily Commentary

MarketMinder’s View: How do markets view earnings? With Q2 US earnings season kicking off, they are top of mind, but while last quarter’s results understandably draw attention, stocks look relentlessly ahead around 3 to 30 months to assess how incoming reality squares with expectations. With that in mind, a subdued Q2 isn’t too relevant at this point. “Earnings growth estimates for the quarter have declined substantially, from 13% last quarter to 4.8%.” This suggests sentiment is low—and earnings could “surprise” higher. But again, backward-looking developments are old hat to forward-looking markets. (The article mentions a specific stock here, which is incidental to the broader theme, so please note that MarketMinder doesn’t make individual security recommendations.) What about forward guidance—e.g., on capital expenditures, potential AI productivity gains and currency effects discussed here? Although managements can provide additional color, they are also widely watched—making them largely priced already as well. Besides, markets generally look through currency effects. As for tariffs, we agree with the conclusion: “To be sure, tariffs could certainly come up for consumer-facing companies, especially smaller ones without the balance sheets to withstand their effects. But overall, investors are looking ahead to 2026 ... meaning they’re primed to look past the impact of this year’s tariff policies.” It isn’t that markets are ignoring tariffs (see early April with any questions), but despite lingering uncertainty, worst-case scenarios don’t appear to be playing out. Stocks appear to be recognizing that—and moving on.

MarketMinder’s View: Please keep in mind MarketMinder doesn’t make individual security recommendations; specific companies mentioned are incidental to the broader theme we wish to discuss. How are earnings shaping up across the pond? “European companies are expected to report a drop of 0.7% year-on-year in second-quarter earnings, on average, according to LSEG I/B/E/S data, below the 0.2% decrease analysts had expected a week ago.” But notice how this deterioration hasn’t deterred stocks. “As of Tuesday’s close, the [European] STOXX 600 was up about 7.4% year to date.” So what gives? One, Q2 earnings are old news to stocks, which care more about the next 10 quarters. Two, weaker expectations lower the bar for positive surprise—which is what moves stocks most. All the attention on tariffs—and the uncertainty surrounding them—on display here likely leaves reality better than appreciated. And with a worse outlook in Europe than America—and tariffs hurting the imposer more than its targets—we continue to see greater opportunity in non-US stocks.

MarketMinder’s View: We have two takeaways from this article. Sensibly, the broader topic is worth being aware of. It is good practice to use history to establish baseline expectations for future market returns. The past doesn’t foretell the future, but knowing how stocks fared through different market environments can illustrate probabilities and thus inform your investing strategy—critical in order to reach your investment goals. That said, we have some issues with how returns are discussed here. Namely, the focus on inflation-adjusted (i.e., real) returns seems a bit misplaced. From a high level, it sounds sensible to adjust returns for inflation—rising prices take a bite out of folks’ purchasing power, so shouldn’t returns account for that? But the issue is, what inflation adjustment would you use? America’s Consumer Price Index or Personal Consumption Expenditures Price Index aren’t cost-of-living indexes, so they won’t fully capture the change of prices individuals face. Moreover, rising prices aren’t the only force affecting returns—what about taxes? Should returns be adjusted for capital gains levies, too? Again, we understand why investors would want to account for inflation’s erosion, but focusing on one price gauge alone risks skewing return expectations in a different way—not helpful for investors. For more, see our 2022 commentary, “From the Mailbag: Some Considerations About Those ‘Real’ Returns.”