Wentz Weekly: Earnings Better Than Expected, But Not Great

Wentz Weekly Insights
Earnings Better Than Expected, But Not Great Amid Tariff Uncertainty

US stocks were higher for the week, offsetting some of the decline from the week prior, sitting just 4.0% from the February all-time highs. It was a week that saw technology outperform as the cap weighted S&P 500 (up 1.88%) outperformed the equally-weighted index by almost 1%. The month of May was quite strong with stocks rising 6.15% for the best month since November 2023, although that was a recovery from the Liberation Day drawdown from early April. Big tech has been the major winner with names like Tesla and Nvidia up over 20% and helping drive the Nasdaq’s 10% month return.

There were several developments last week on the trade/tariff front that just add to the uncertainty for investors.

Courts gave a surprise announcement late Wednesday when the US Court of International Trade said the tariffs imposed by Trump under the International Emergency Economic Powers Act (IEEPA) were illegal. These tariffs include the 10% baseline tariff, 20% incremental tariff on China and 25% tariff on non-USMCA compliant imports from Canada and Mexico.

The Trump administration says it may take the tariff case to the Supreme Court any day. Meanwhile, a federal appeals court temporarily preserved the tariffs while the Trump administration appeals the case. It can be argued whether the ruling is positive or not, but the bottom line is it just creates more uncertainty for markets and investors over what the ultimate tariff rate will be and the timeline on when we will have more clarity. If it is struck down, we expect the administration to find loopholes to still impose tariffs to maximize negotiations.

Sentiment on trade/tariffs remained volatile all week. Treasury Secretary Bessent said on Friday that talks with China were a “bit stalled” however did not go into much detail and said negotiations will continue in the coming weeks. In addition, Trump accused China of violating the agreements made in the “pause” of retaliatory tariffs. Several other reports are saying the US is planning wider tech sanctions on China, including to cover subsidiaries of Chinese firms, a possible escalation of tensions. Something that could kickstart talks again though is a report that the White House is trying to organize a call between Trump and Chinese President Xi.

There is also more talks of the so called “TACO trade” which was highlighted in a White House briefing where a question was made that “Trump Always Chickens Out” (TACO). We could see a situation where Trump pushes back at this idea, ramps up restrictions/tariffs on Chinese companies/products, increasing uncertainty for investors. The biggest catalyst for the market rally the past two months was the 90-day pause on tariffs, so these headlines could quickly reverse those trends.

Investors seem to have developed some complacency recently over trade headlines, however one of the largest positive surprises we saw the past several weeks is earnings that were much better than expected. With nearly all S&P 500 companies reporting quarterly results, the earnings growth rate for the quarter is 13.3%, better than the 11% that was expected when the quarter began.

We did notice though that earnings were better than feared but were not great. Going into first quarter earnings season, expectations were already reduced give then uncertainty. At the beginning of the year Q1 earnings were expected to grow nearly 15%. However, the bigger disappointment comes from earnings expectations for the whole year.

As seen in the chart below, earnings for the full year 2025 were expected to grow 15% as recent as January. Over the past several months that consensus earnings growth estimate has consistently decelerated and the most recent estimates show a consensus growth of 9.2%.

At current S&P 500 levels of 5,920, the forward price-to-earnings ratio (a valuation measure for stocks, the higher the number reflects higher or more expensive stock price) as of early February with the higher growth estimate was 21.2 times, but with the most recent earnings estimates stocks are pricier at a 22.6 times valuation. For reference, the historical average is closer to 17.5x.

The Magnificent 7 stocks (Microsoft, Nvidia, Apple, Alphabet, Amazon, Meta, and Tesla) have generated a majority of the earnings growth as seen in the chart (green line). We would like to see earnings expand again, and see the other 493 companies contribute more to earnings growth, for the equity market upside to continue through the year.

With earnings season mostly behind us, all eyes will remain on the Trump Administration and its next steps on the tariff front. There is still positive sentiment on potential trade deals but that could quickly change. The next big date to keep in mind in July 9 when the 90-day pause on reciprocal tariffs ends. As we get closer to that date with no deals, the more volatility we should expect. This week the other big event will be the labor market data, specifically Friday when the DOL releases its monthly labor report where economists are estimating 130,000 jobs were added to the economy, slowing from recent months.

Week in Review:
Stocks were higher last week and gained back most of the decline seen the week prior with technology the clear outperformer. The major US indices finished as follows: Nasdaq +2.01%, S&P 500 +1.88%, Dow +1.60%, and Russell 2000 +1.30%. Bonds gained after recent weakness in May. The 2-year Treasury yield fell 9 basis points to 3.91% while the 10-year yield fell 11 basis points to 4.41%. The dollar index bounced off the lowest levels of the year with a 0.22% increase on the week while gold pulled back slightly from recent highs. Bitcoin fell 3.1% after recently reaching new all-time highs. Meanwhile oil fell 1.2% over speculation OPEC was taking another step to normalize oil production.

Recent Economic Data

• Personal Income & Outlays: Personal incomes increased at a faster pace than expected in April, with consumer spending increasing as expected, and the inflation index slowing slightly more than expected. Details below:
  • Personal incomes rose 0.8% in April, much quicker than the 0.3% increase that was expected and followed another strong 0.7% increase in March. Incomes are 8.6% higher from a year ago. The wages and salaries component of income, the largest component of incomes, rose 0.5% and up 5.4% over the past year. Driving much of the upside in income was transfer payments, more specifically government social benefits like social security, Medicare, and Medicaid, where the average income rose 2.8% in the month and up an usually high 15.8% over the past year.
  • Consumer spending increased 0.2% in April as expected and slowing from the 0.7% increase seen in March. Spending on goods fell 0.1% while spending on services rose 0.4%. Compared to a year ago spending is up 7.0% with goods spending up 3.2% and services spending up 8.9%.
  • The PCE price index increased 0.1% in April and is up 2.1% over the past year, slowing again from the 2.2% increase in March and bringing the inflation rate that much closer to the Fed’s 2% target. Core inflation continues to run a little hotter, up 0.1% in the month as expected but up 2.5% over the past year.
• Durable Goods Orders: Durable goods orders have been on a wild ride this year and in April declined 6.3%, which was actually a little smaller of a decline than expected. This follows four straight monthly increases, including a 7.6% increase from the month prior. The swings in durable goods orders are due to transportation orders, which fell 17.1% in the month. Shipments of durable goods have increased for five straight months, up 0.4% in April. Shipments of nondefense core capital goods excluding aircraft, which is a key variable in the calculation of GDP, fell 0.1% in the month after a solid 0.5% increase in March.
• Case Shiller Home Price Index: The Case Shiller home price index showed home prices across the US increased 0.8% before seasonal adjustments in March but declined 0.3% after seasonal adjustments. The index for home prices is up 3.4% over the past 12 months, down from the 4.0% annual gain in February. The New York, Chicago, and Cleveland regions saw the largest annual increases at 8.0%, 6.5%, and 5.9%, respectively, while the Tampa region saw a decline of 2.2% and Dallas and Denver regions saw the smallest increases of 0.2% and 1.4%. The report said affordability remained “severely constrained” with monthly payments relative to incomes at multi-decade highs, but did not worsen in early 2025 with borrowing costs stabilizing.
• Money Supply: The amount of money in circulation, called the money supply which includes cash, deposits at banks and money market balances, saw a massive increase during the pandemic, by far the largest ever, then declined for about one and a half years in 2022-2023, and has since been back on the rise. The money supply rose $155.7 billion in April, or 0.7%, and is up $930 billion, or 4.4%, over the past year, accelerating from the 3.9% annual rate in March for the fastest pace since the pandemic surge.
• GDP (Second Estimate): The second revision to first quarter GDP, or Gross Domestic Product – a measure of domestic production or economic growth, confirmed a decline in the quarter of 0.2% compared to the 0.3% decline estimated last month. The upward revision was due to an upward revision to investments which was partially offset by a downward revision to consumer spending. Consumer spending, which makes up nearly 70% of the US economy, grew 1.2% in the quarter.
• Jobless Claims: The number of jobless claims the week ended May 24 increased 14k to 240,000, with the four-week average unchanged at 231,000. The number of continuing claims increased 26k to 1.919 million for the highest level since late 2021. The four-week average increased to 1.890 million, also the highest since late 2021.
• Consumer Confidence: The Conference Board’s consumer confidence index saw a large jump in May, possible due to the optimism around potential trade deals, with the index rising 12.3 points to 98.0 from a depressed level of 85.7. The present situations index rose 4.8 points to 135.9 while the expectations index surged 17.4 points to 72.8, although still remains below the level of 80 that typically signals a recession ahead. While consumers were more positive about business conditions, their appraisal of job availability weakened for the fifth consecutive month.

• Tesla: Elon Musk said he has begun the process of stepping down from the head of the Department of Government Efficiency (DOGE), which was set to expire May 30 based on the original hiring, and added he will be returning to his companies 24/7. In addition, it was reported Tesla sales in the European Union dropped for the fourth consecutive month, measured by new-car registrations for Tesla models which reflect sales, as it faces increased competition. The new car registrations fell 53% last month. The Wall Street Journal report says Tesla has faced increased competition from Chinese rivals expanding aggressively in Europe.

• Nvidia: Shares of the second largest publicly traded company, Nvidia, moved higher on Thursday after it reported its quarterly earnings results after the close Wednesday. Despite taking a $4.5 billion charge due to excess inventory of its H20 chip that the Trump Administration recently restricted its exports to China on, the company beat sales and earnings expectations. However, its outlook came up a bit short after it said it reflects a $8.0 billion sales impact from the H20 chip restrictions. Its CEO Jensen Huang described the demand for its advanced chips, the brains behind artificial intelligence, as “incredible” again. He added “countries around the world are recognizing AI as essential infrastructure–just like electricity and the internet–and NVIDIA stands at the center of this profound transformation.” In addition, the company said it will launch a new Blackwell chip for China and mass production will begin as soon as early June.

• Apple: Bloomberg reported Apple is planning one of the biggest changes to its operating system names in a major rebranding that will be tied to software redesigns. Its operating system names will be identified by the (upcoming) year rather than the version number, meaning the current iOS 18 will give way to iOS 26 later this year. Updates on other devices will be known as iPad OS 26, watchOS 26, etc, instead of each having different numbers because their initial versions debuted at different times. It plans to make this announcement at its Worldwide Developers Conference June 9, where it also plans to announce major updates to its devices and software.

• United Airlines & JetBlue: United and JetBlue announced an agreement to a partnership that will allow air travelers to use loyalty points to book flights across both carriers. The partnership and agreement will help integrate operations in the New York City area by giving United a return to JFK airport which has been a goal since running into air traffic control problems at its Newark hub. And for JetBlue the partnership will give access to some of United’s flight times at its nearby Newark hub. Meanwhile, United says the flight disruptions from the air traffic control issues at Newark caused it to lower its earnings guidance for the year. 

Other News:

• Fed Meeting Minutes: The Federal Reserve released the minutes from its May 6-7 meeting with minutes noting Fed members continuing to prefer more cautious approach and wait and see for more rate cuts. The minutes highlighted how officials agreed the Fed is well positioned to wait for more clarity on the outlook for inflation and the labor market and agreed that the increased uncertainty warrants a more cautious approach. They did note the difficult tradeoff that will exist if inflation proves to be more persistent at the same time employment and economic growth weakens. In addition, policymakers are viewing a recession as almost as likely as their baseline forecast. 

• Reconciliation Bill in the Senate: After the House narrowly passed its version of Trump’s “One Big, Beautiful Bill,” some Senate leaders are saying they have enough Republicans Senators against it to stall the process “until the president gets serious about spending reduction and reducing the deficit,” according to Wisconsin Senator Ron Johnson. Fiscal hawks like Johnson have openly signaled they will not support the package in its current form due to the estimated cost of the bill and its potential impact on the federal deficit. 

• Russia/Ukraine War: Russia engaged in some of the largest drone and missile attacks on Ukraine since Russia’s war in Ukraine began in 2022, according to Reuters. President Trump has shown increased frustration and responded by saying Russia President Putin was “playing with fire.” Reuters also reported Putin’s conditions for ending the war in Ukraine include a demand that Western nation leaders pledge in writing to halt NATO’s shift eastward and life a majority of the sanctions on Russia.