Hi, everyone. I'm Liz Ann Sonders, and this is the July Market Snapshot. Thanks, as always, for tuning in. On this month's relatively short episode, I'll share a preview of the all-important second quarter S&P 500 earnings season about to kick into high gear next week. 

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Now, reporting season begins with investors facing a mix of some slowing in earnings momentum, ongoing macroeconomic uncertainty, obviously, especially related to policy, and high expectations for the technology and communication services sectors. 

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As detailed here, second quarter earnings are expected to rise less than 6% year-over-year, with really wide sector divergences persisting. You've got strong year-over-year growth expected for communication services and for technology, but that's offset by notable weakness in the energy sector. Now, tech sector earnings are expected to remain strong throughout this year. While communication services growth is expected to slow significantly in the second half. On the other hand, the laggard, energy sector's growth rate, is actually expected to improve as the year progresses. 

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Now, second quarter earnings follow what were very strong earnings in the first quarter, at least relative to where expectations were at the start of that reporting season. You can see the hook higher here. Estimates at the start of first quarter season were for less than 8% in terms of year-over-year growth. That was before the season began in April. That ultimately was a bar set too low, given the ultimate growth rate of nearly 14% when all reports were in. 

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However, as shown, analysts have not extrapolated that stronger growth in the first quarter into the remaining three quarters of this year. That suggests that this policy-related uncertainty instability continues to cloud the outlook, but could also mean that yet again, the bar has been set too low in terms of estimates as we move into the meat of the second quarter reporting season. 

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Now, guidance and earning surprises will take on heightened importance as markets remain sensitive to forward-looking commentary from companies, especially amid all this policy uncertainty and instability related to trade, tariffs, and interest rates. Much like the stock market over the past couple of months, things have improved, though. As shown here, Citi's US Earnings Revisions Index jumped back into positive territory after falling to its lowest level since the 2022 and pandemic bear markets, although it's rolled over again recently. 

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Now, building on the momentum from the first quarter of this year, the number of companies issuing positive earnings per share guidance for the second quarter has picked up. Per data from FactSet through the end of June, more than a hundred S&P 500 companies have issued guidance for the second quarter, 51 of which issued positive guidance. So far, that's above both the five-year average of 42 and the 10-year average of 39. 

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Now, most of the jump in positive guidance has been driven by the tech sector. That said, the tech sector has also seen the largest increase in the number of companies issuing negative guidance for the quarter. So lots of divergences are in place, particularly in the tech sector. 

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In terms of tariffs impact on companies' bottom lines, we can say so far so good. In fairness, second quarter results are unlikely to incorporate the full tariff effect given the many pauses that were enacted for certain countries and sectors, as well as the fact that the effective US tariff rate hadn't yet reached double digits by the end of May. 

Now, incorporating the actual releases from the small percentage of S&P 500 companies that have already reported second quarter results, the earnings beat rate is somewhat middling so far. 

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On the other hand, the revenue beat rate is soaring. It is way too early, though, to state with any certainty, but what would be suggested by a continued divergence between the two is that profit margins may be coming under increasing policy-related pressure. 

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There's also increased attention be given to stocks of companies that beat or missed estimates. If you look at the post-earnings stock price performance, and that's for the first full trading day following an earnings release, it's lately being rewarded. The beats are being rewarded less than in the recent past. 

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On the other hand, some asymmetry has unfolded, with much stronger downside reaction to misses than there has been upside reaction to beat. So we'll have to see if that persists throughout reporting season. 

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So here are my closing thoughts. Analysts continue to expect growth in corporate earnings, but as we head into the beginning of reporting season, estimates remain pretty tepid for the second quarter. Now, if companies manage yet again to step over this lowered bar and maintain a fair degree of confidence when it comes to policy risks, we could face a repeat of the first quarter during which the growth rate hooks higher throughout the season. As we pointed out in our Mid-Year Outlook, the economy does still face obvious headwinds. Ultimately, we think, though, earnings will be the lens through which we can judge the overall economy's resilience in the face of tariffs, higher rates, and a slowing labor market. So far so good, but we think the bulk of the market's focus will be on forward guidance, as opposed to backward looking results. 

Thanks, as always, for tuning in. 

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