Let’s Go
The game of Go, also known as Igo in Japan, is a two-player strategy board game. Players aim to control more territory on a grid board by surrounding empty spaces with their stones and capturing opponent’s stones. The game ends when both players pass their turns, indicating they cannot improve their position. The board is constantly changing as players build territories and capture stones, making for a dynamic and evolving game much like the current tariff negotiations.
The U.S. Government reached a trade deal with Japan yesterday that will impose 15% tariffs on imports, including automobiles. The deal includes a $550 billion fund to make investments in the US, with Japan agreeing to provide the funds to invest in projects in America. Japan will also buy 100 Boeing# aircraft, boost rice purchases, and buy $8 billion in agricultural and other products, while hiking defense spending with U.S. firms.
On the flip side, the European Union (EU) plans to hit the US with 30% tariffs on about $100 billion worth of goods if the administration carries through with its threat to impose that rate on most of the EU’s exports after August 1st. Reports circulated yesterday that the US and EU were nearing a deal that would impose a 15% tariff on European imports, similar to the deal with Japan, but with the possibility of exemptions for specific products such as aircraft, alcohol, and medical devices.
Earnings reports and tariff impacts
Based on recent earnings releases, several companies have specifically mentioned or highlighted the impact of tariffs on their financial performance. General Motors# reported a significant $1.1 billion hit to its second-quarter core profit due to tariffs, and warned of a potentially larger impact in the third quarter. RTX Corporation# lowered its overall 2025 profit forecast, but now expects a $500 million headwind from tariffs, down from an initial $850 million estimate. Stellantis, the maker of Jeeps, warned of a loss in the first half of 2025, partially attributed to the impact of US tariffs, which are estimated to have cost the company around $2.7 billion. Danaher#, the science-equipment producer, mentioned a tariff exposure of a couple hundred million dollars in the second quarter. However, this is down from a $350 million prior estimate as the company noted that mitigation strategies have largely offset the impacts. Coca-Cola# expects the tariff impact on its business to be manageable, but has moderated its full-year profit expectations. While tariff commentary by management teams is indicative of the economy-wide impact, market reaction has been both positive and negative depending upon expectations and the severity of any earnings hit.
Early Q2 earnings are good to go
Second quarter earnings season is off to a generally positive start. The blended earnings growth rate for Q2 S&P 500 earnings currently stands at 5.6%, better than the 4.9% expected about a month ago. Of the 12% of S&P 500 companies that have reported for Q2, 83% have beaten consensus EPS expectations, above the 77% one-year average. In aggregate, companies are reporting earnings that are about 8% above expectations. Banks have dominated the reporting thus far with macro themes revolving around a still healthy overall consumer, benign credit, and an improving investment banking pipeline of deals. Looking ahead, earnings are expected to increase 6% in Q3 and 7% in Q4. For all of 2025, earnings are expected to increase by about 9%. That would be a healthy outcome if realized, but tariff developments could be a game-changer once again.
Alphabet# (Google’s parent), is one of the first Magnificent 7 stocks to report earnings, and came through with a positive earnings surprise versus expectations yesterday. However, in order to achieve future growth, Alphabet will be increasing its capital expenditures by $10B more than its previous guidance this year. Google’s advertising revenue growth trends were positive, with both Search & YouTube growth accelerating. Google’s operating margin remained at a 12-year high and Google Cloud growth accelerated to 32%. The stock is reacting positively pre-market.
Go For It
We have not seen a major economic slowdown, job losses or significant inflationary pressures from tariffs yet, although the second half of 2025 could witness an uptick in these metrics based on earnings commentary. The next meeting of the Federal Reserve to decide interest rate policy is next week, though no policy change is expected. Expectations continue to focus on two rate cuts this year at one-half percentage point at a time. Against a tumultuous backdrop, the 10-year Treasury yield has traded in a range of 4.0-4.8% over the past six months, and now sits at 4.4%.
For now, trade negotiations make for volatile markets on the upside and downside. Like the game of Go, this tariff turmoil ends when no more ground can be taken by either side. Meanwhile, despite all of the volatility in markets and interest rates, the S&P500 and Nasdaq are both up over 8% this year and at record closing highs. A few more Go stones need to be placed on the gameboard to solidify our trade and tariff position, which would go a long way toward calming markets down.
Jennifer Lopez turns 56 today, Kristin Chenoweth turns 57, and Barry Bonds hits 61. The fact that Amelia Earhart was born on this day in 1897 and attended the Ogontz School in Rydal, PA, was not lost on us.
Christopher Crooks, CFA®, CFP® 610-260-2219