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Key Takeaways
- Many companies and Wall Street analysts have yet to incorporate the impact of tariffs into their earnings forecasts, which is why Deutsche Bank analysts are looking past a strong Q1 earnings season and see "significant potential downside" to earnings estimates.
- Deutsche Bank says it expects earnings to contract nearly 15% this year if President Trump's tariffs are implemented as they were first proposed.
- Trump has repeatedly rolled back and softened his tariffs; the White House also has said it's negotiating trade deals with "more than 70 countries," giving Wall Street hope for significant relief.
Wall Street has been cheering a surprisingly good earnings season in the last few weeks. Some market watchers warn that investors are underestimating the pain that's just over the horizon.
Solid earnings reports rolled in last week, helping the S&P 500 notch its longest winning streak in two decades. Growth has exceeded expectations in this quarter. A Deutsche Bank analysis shows that share buyback announcements are at a record level. This is another sign of strength.
The outlook of corporate America has remained positive despite the uncertainty caused by President Donald Trump’s policies on tariffs. Analysts have cut their earnings expectations for the current quarter by 2.6%—more than average but not apocalyptic, according to Deutsche Bank analysts led by Chief Strategist Binky Chadha.
But there's a catch. "Many companies are either not incorporating the tariff impact into their guidance or suspending it given the uncertainty, and in our reading, analysts are, in turn, waiting for more clarity before adjusting numbers,” the analysts wrote in a note on Friday.
They suggest that the absence of forecasts on tariff-impact is why they see a “significant potential downside” to consensus earnings estimates.
Deutsche Bank Sees 'Double-Digit' Earnings Plunge
Deutsche Bank estimates that if the proposed tariffs go into effect, S&P 500 earnings will contract by nearly 15% this year. They expect profits will decline by 4% this quarter after growing by 10% in the first. “Further, we expect growth to fall into double-digit negative rates for Q3 (-10%) (and Q4 (-13%)) as the tariff impact worsens,” the analysts wrote.
The analysts at Deutsche Bank are more pessimistic that most Wall Street analysts. They say that the consensus is that the growth will slow down to 4% in the first quarter of this year and then accelerate to 7%-8% in the second. According to them, this type of growth would be impossible without “a rapid and substantial relenting on trade policy,” which they aren’t willing to gamble on.
Detroit is a good place to look for clues on how tariffs might affect earnings estimates. Wall Street has slashed the second-quarter estimates of earnings for automakers – arguably the industry where tariffs are most clear – by nearly 20 percent.
It’s possible that the tariffs announced in early April – most of which were paused until later this year – will end up being lower than Wall Streets worst case scenario. Trump has granted certain industries temporary exemptions, and he’s softened many of his tariffs.
The White House stated last month that they are negotiating with more than 70 countries and recently expressed an interest in deescalating their trade war with China. (Investopedia’s most recent report on trade and the China-US relationship is available here.)
