3 Things You Need to Know This Week | China GDP, US Inflation, Q2 Earnings Season

Transcript

Paige Tyson:

Hello, and welcome to 3 Things You Need to Know this Week. Our regular series designed to help you sift through the noise across financial media and understand what really matters for markets. To stay up to date with our latest market insights, subscribe to our YouTube channel or visit FisherInvestments.com. With that, here are three things you need to know this week.

First up, China Q2 GDP.

On Tuesday, China will release its Q2 GDP report. China's economy grew 5.4% year-over-year in Q1, beating market estimates. For Q2, experts predict slower growth, but importantly, still positive. There's been a lot of focus on how US tariffs will impact China's economy moving forward. Back in May, the US and China announced a trade truce, but talks broke down in early June when China restricted rare earth mineral exports, and the US started revoking visas for Chinese students. Things began looking up in mid-June, when both nations agreed on a framework to keep trade negotiations going. But tensions flared again last week when President Trump announced an August 1st deadline for countries to complete trade deals.

China responded to this news by warning the US that restoring higher tariffs could lead to retaliation. Now, while it's true US-China tariffs are bad for the global economy and worth watching closely, the real question for stocks is whether reality turns out better or worse than what's already expected. We see some reasons to believe US-China tariffs might not be as damaging as some fear. For example, while the US is a significant trade partner for China, it only accounts for about 15% of Chinese exports. This means the majority of China's trade, and in fact, global trade overall, is not directly tied to the United States. This is just one of the reasons why we believe the global economy can likely navigate the tariff situation better than many anticipate.

Next, US CPI inflation.

Tuesday also brings the latest US consumer inflation data. Recent CPI inflation, which measures changes in consumer prices, has stayed well below its long term average of 3.2% year-over-year, and we expect inflation to remain relatively moderate going forward. Inflation expectations have calmed recently, although they're still higher than average. The University of Michigan sentiment survey showed inflation expectations easing in May and June after climbing for a few months, but they continue to signal consumers expect an inflation spike over the next 12 months. And current expectations are still higher than what they were during the summer of 2022, a time when actual inflation and supply chain issues were far worse than what they are now. Some worry these higher expectations might cause inflation to rise, but we see sentiment surveys as a snapshot of how people are feeling, not accurate predictors of what will happen next.

Why? Because we believe inflation is a monetary phenomenon where there's too much money, chasing too few goods and services, leading to price increases across the economy. Many inflation fears today revolve around tariffs. While tariffs might raise prices for some goods and services, they don't increase the money supply overall. And right now, money supply growth remains modest. When we take that alongside other factors, we believe inflation is likely to stay milder than what many consumers currently expect.

Finally, Q2 earnings season.

This week marks the start of the Q2 earnings season, with several of America's largest financial companies reporting results at the beginning of July. Analysts were forecasting about 4% year-over-year revenue growth and 5% earnings growth for S&P 500 companies in Q2. These estimates have been revised down some, compared to a few months ago. But importantly, global economic growth has provided companies with plenty of opportunities to drive profits over the past few years. We expect that trend to likely continue for the remainder of 2025, even with ongoing concerns about tariffs and other challenges.

Many companies have flagged potential risks to their earnings forecast, mostly tied to tariff uncertainty. But remember, markets are looking forward. Stocks often move ahead of earnings results for previous quarters. So, while earnings and forward guidance are worth keeping an eye on, it's also critical to factor in other market drivers, like politics and investor sentiment, to assess where the stock market may be headed. For instance, political uncertainty remains a headwind, particularly in the US. But as these tariff negotiations drag on, they lose some of the surprise power to impact stocks. Meanwhile, the recent stock market correction seemed to help reset investor sentiment, which may make it easier for reality to deliver positive surprise and support the ongoing bull market.

And that's it for this episode of 3 Things You Need to Know this Week. For more of our thoughts on markets, check out This Week in Review, released every Friday. You can also visit FisherInvestments.com anytime for our latest thoughts on markets. Thanks for tuning in and don't forget to hit "like" and "subscribe!"