Q2 earnings point to stock strength

Good-looking guidance

Company guidance has shown an unusually positive bent as well, supporting the rise in analyst estimates. We found little sign of tariff impact in the Q2 data, with profit margins holding up exceedingly well in the quarter. And despite worries of tariff hits in the coming quarters, companies are so far guiding ahead of expectations.

On balance, we find U.S. companies to be adept at managing their balance sheets and diversifying their supply chains to accommodate any structural shifts that changes such as tariff rates might impose. Retailers, for example, are working down their pre-bought inventory and many have purchased conservatively in anticipation of lower sales volume on discretionary items should consumers resist higher prices.

The buzz beyond tariffs

What are companies focused on outside of tariffs? We hear managements talking about strong AI-related capex, figures that were once again revised higher this earnings season by the four biggest spenders. Potential for lower taxes is another topic of discussion we are watching, as it could ignite strong free cash flow, giving companies more to invest in their business. Several companies cited the potential benefit of accelerated bonus depreciation (a more immediate deduction of business expenses) in allowing them or their corporate customers more flexibility to pursue investment. Healthcare, a sector with high capex and R&D spending, could potentially benefit disproportionately from a more favorable tax paradigm.

We believe a combination of easier taxes and greater certainty around tariffs could boost corporate confidence and drive broader capex across sectors. We are sharpening our pencils to capitalize on opportunities as this develops. One area we have our eyes on is industrials, which could see increased demand for things like electrical equipment, heating and cooling systems, and even elevators as AI data center buildout continues. Some of this may be priced in, as multiple expansion has been a driver of strong returns for the sector year-to-date while earnings have yet to shine.

Thoughts for concerned clients

Some clients may worry that U.S. stocks have come too far too fast since the April market plunge, and that the path of least resistance for prices is down. We would argue that high multiples in and of themselves do not cause market corrections. As long as companies have the money and the opportunities to invest ― thereby driving continued earnings growth ― multiples are not a worry. Markets derail when the underpinnings of the economy fall apart. We do not see worrisome signs here. Despite weakness in the lower-income cohort, Q2 earnings showed a resilient U.S. consumer, buoyed by a strong high-income consumer, still low unemployment and continued wage growth.

We also see robust earnings, healthy company margins, strong free cash flow (that could get stronger with policy support) and ample opportunity for corporate America to grow. Of course, volatility is a feature (not a flaw) of the stock market and could be elevated as investors anticipate and digest incoming macroeconomic data. To us, this underscores the importance of rigorous fundamental research to understand each company’s underlying strength and the wisdom in building elements of resilience into equity portfolios in times of change and uncertainty.