Corporate Earnings: What to Watch and Why It Matters
Earnings are always a major driver of the stock market, but this season carries even greater weight than usual. As economist Larry Kudlow famously said, “Earnings are the mother’s milk of stock market growth.” This earnings season is particularly important because of how much has changed since the last earning seasons. Rarely does a corporate tax code change so drastically from one quarter to another, but that’s what’s happened. It’s rare to see such a dramatic shift in tax policy from one quarter to the next. The most significant changes include major updates to capital expenditure (CapEx) and research and development deductions. These won’t impact current earnings directly, but they will play a major role in how companies forecast their future. Investors will be looking closely to see how corporate America plans to leverage these changes and how they might use them to drive long-term growth. These deductions allow businesses to front-load expenses, which reduces tax liability now but creates room for investment in future earnings potential. That’s a positive development for both companies and investors. The real question is how corporate leaders will frame these decisions, and will they take bold steps to ramp up investment and innovation?
Secondly, we really want to see how corporate America is using AI as that has started to improve. AI is a highly capital-intensive investment, and investors want to know how companies are beginning to use it. Tariffs also remain an important factor. Recent data from the U.S. Budget Department shows that in June, federal tax revenues increased by $101 billion compared to the same time last year. Interestingly, most of that increase came from individuals, higher payroll taxes and income taxes, not corporation taxes. In fact, corporate tax revenue was down 0.4% year over year. Roughly a third of the additional revenue came from tariffs. While the numbers don’t specify which companies are absorbing those costs, it’s clear that tariff-related expenses are impacting business bottom lines. The question is, are public companies, like those in the S&P 500, carrying that burden, or is it falling more heavily on smaller, private firms? A lot of data is going to be coming out of these earnings. We’ll not only learn how much companies earn but also how they’re adapting. The largest financial institutions will report first, and they reach nearly every part of corporate America. Where the money is flowing and where it’s being held back will offer vital insights as earnings season unfolds. We’ll get a lot of data right off the bat, but then we’re going to be following it throughout all of earnings season.
Second Half Market Outlook: What History Tells Us
While earnings are front and center, it’s also a good time to look ahead. After a volatile start to the year, our attention now turns to what the market could have in store for investors during the second half of the year. Looking back at historical data provides some guidance. The S&P 500 wrapped up in the first half of the year with a gain of 5.5%, recovering strongly from a deep April correction. Historically, when the index posts a positive first half, it goes on to deliver an average second-half return of 6.1%. More specifically, when first-half gains have landed in the 5% to 10% range, just like we saw this year, the second half has also averaged a 6.1% return. Even more encouraging, in 86% of those cases, the second half ended positively. While history doesn’t guarantee future results, this data supports a cautiously optimistic outlook. Investors will be paying close attention not just to what companies have already done, but also what they plan to do next.
Greg Powell, CIMA®
President and CEO
Wealth Consultant
Email Greg Powell here
Bobby Norman, CFP®, AIF®, CEPA®
Managing Director
Wealth Consultant
Email Bobby Norman here
Trey Booth, CFA®, AIF®
Chief Investment Officer
Wealth Consultant
Email Trey Booth here
Ty Miller, AIF®
Associate Vice President
Wealth Consultant
Email Ty Miller here
Fi Plan Partners is an independent investment firm in Birmingham, AL, with a team of professionals serving clients across the nation through financial planning, wealth management and business consulting. The team at Fi Plan Partners creates strategies in the best interest of their clients using fee based investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
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