Faced with uncertainty, investors are betting on corporate America

Letters every day, new sectors targeted… After a few weeks in which international affairs and budget debates in Congress have dominated the news, Donald Trump is relaunching his tariff offensive. However, these threats have not prevented US indices from reaching new record highs. While investors may sometimes doubt America, they remain unwavering in their confidence in corporate America.

We are now just a few days away from the start of the corporate earnings season. This week, we have put together an overview of the issues at stake in the first reports.This is a key moment when investors will be able to try to tune out the noise surrounding tariffs and Donald Trump's announcements and focus on the fundamentals: earnings per share.

As we enter this pivotal period, the first thing to note is that expectations have been revised downwards. According to Factset, which tracks earnings forecasts on a weekly basis, EPS forecasts have been lowered by 4.3% since the start of the quarter. To provide a comparison basis, over the past five years, the average downward revision of expectations for a quarter has been 3%.

Looking up

Uncertainties, particularly related to tariffs, have therefore led analysts to be more cautious about the second quarter.

Paradoxically, however, this is a factor that makes strategists fairly confident. The reasoning is as follows, as summarized by Max Kettner of HSBC: "Overall expectations have been too low in our view," creating "a very low bar to clear." This is especially true given that US companies are particularly adept at pushing analysts to revise their forecasts downward... so they can deliver a positive surprise on the day the results are released.

The logical conclusion of this reasoning is higher target prices for the S&P 500. In the last few days alone, Bank of America has updated its year-end target from 5,600 to 6,300. Meanwhile, Goldman Sachs has raised it from 6,100 to 6,600.

The general mood is therefore fairly optimistic, even though US indices are already at record highs after a strong rebound in recent weeks, led, as always by tech stocks. Yesterday, the Nasdaq set a new record, not far from 23,000 points, while Nvidia reached the $4 trillion market capitalization mark.

All this comes as Donald Trump has reignited the tariff saga, extending the July 9 deadline until August 1 and broadening the threat with new sectoral tariffs (copper, semiconductors, pharmaceuticals).

The coming weeks will tell us whether the US president will follow through or back down again. At this stage, the market seems to be betting on the latter, given the movements of the last few days.

It is impossible to predict what Donald Trump will do on August 1, but one thing is clear: uncertainty remains, and this will push the Fed to wait and see. A rate cut in July is now definitely out of the question: September also seems rather optimistic as things stand.

The exceptionalism of corporate America

While uncertainty about the US economy remains high, investors have far fewer doubts about the large companies listed on the S&P 500. They continue to bet on the exceptionalism of corporate America, rather than on American exceptionalism.

After all, the S&P 500 is not the US economy, and the index is mainly driven by a few large tech stocks, whose growth trends show no signs of slowing down. A quote from Bank of America sums up the investor mindset perfectly: "The US is not exceptional, but corporate America may be."

Beyond technology, S&P 500 companies have shown in recent years that they can weather shocks, reorganize, and pass price increases on to consumers to preserve their margins.

This pricing power will be put to the test again in the coming months. Now that everyone understands that there will be significant tariffs, the question is who will bear the cost. According to Goldman Sachs' estimates, less than 20% of the cost of tariffs will be absorbed into margins.

Estimated distribution of the cost of customs duties between consumers, US companies, and exporters

Finally, another factor that should benefit US companies in the coming quarters is the exchange rate. The dollar has depreciated significantly since the beginning of the year, which is helping US companies' overseas earnings. 40% of S&P 500 companies' revenue is generated internationally.

Since Covid, we have been living in an environment of successive shocks and high uncertainty. And every time investors have doubted, every time the likelihood of recession has risen, it has been the earnings season that has reassured the market. To quote a phrase often used by investors: "Never underestimate corporate America."