US Stocks: Warning Over Deteriorating Corporate Performance Prospects Persists
2025-05-14
■ Current financial reports are viewed as good, but profit expectations continue to decline.
■ The US and Chinese governments have reached an agreement on a substantial reduction in tariffs, but worries about the declining performance of US corporations remain.
As of last weekend, 450 companies in the S&P 500 index had released their first quarter 2024 financial reports. According to financial information company LSEG I/B/E/S, 76% of these companies reported earnings per share (EPS) that exceeded market expectations. The full-year EPS growth is anticipated to be 14.1% year-on-year (based on actual data for companies that have released results, and market expectations for those that have not), significantly higher than market expectations prior to the release of the financial reports in early April (8.0% year-on-year growth), making the overall results appear good. By industry, healthcare (from 38.3% year-on-year growth to 46.2%), communication services (from 6.2% to 31.0%), and information technology (from 16.1% to 19.1%) all surpassed expectations. In the financial reports from large technology companies, investments in artificial intelligence (AI) remained robust, with some companies indicating plans to accelerate AI investments, which garnered a positive market reaction.
Looking ahead, EPS in the second quarter (April-June) is expected to grow by 6.3% year-on-year, with growth in each successive quarter projected to be below 10%. The growth forecast for 2025 has also been cut from 10.5% in early April to 8.7%. Due to anticipated declines in crude oil prices, the EPS forecast for the energy sector has been sharply reduced from a 0.9% growth to a decline of 10.5%. Furthermore, the increase in costs and the slowdown in income growth resulting from the US government's tariff hikes, along with concerns about waning personal consumption, have significantly impacted economically sensitive sectors such as consumer stocks (from 5.3% to only 0.4%). In this context, while the expected price-to-earnings ratio (PER) fell to the 18 times range in April, it has since rebounded to around 21 times, signaling a return to a high valuation range.
The US and Chinese governments have reached an agreement to reduce elevated tariffs. According to the joint statement issued on the 12th, both sides agreed to implement the following measures before the 14th: the United States will rescind part of the 145% tariff on China, maintain the base tariff at 10%, and suspend the additional 24% tariff for 90 days. Including the added 20% tariff on illegal drugs, the total tariff for the upcoming 90 days will be 30%. China will eliminate parts of its 125% tariff on the United States and adjust the tariff rate to 10%, while the 24% tax reduction will also be suspended for 90 days. Meanwhile, tariffs on certain categories, including liquefied natural gas (LNG) and soybeans, will stay unchanged. President Trump mentioned on the 9th that an 80% tariff on China was reasonable, and the tariff level after this adjustment is significantly lower than expected. With the downside risks to the economy and corporate performance linked to the tax increase being eased, the Dow Jones Index closed above its level on April 2 (prior to the announcement by both parties) yesterday (the S&P 500 Index surpassed it on May 2). However, even if the business environment for companies has not worsened more than expected, it is challenging to assert that it has improved compared to the situation before the tariff increase. In the short term, the market may experience a rebound in stock prices due to alleviated concerns (a gradual recovery), but worries regarding the deterioration of corporate performance prospects are likely to persist through the US-China trade negotiations. Although the risk of a stock price crash has temporarily decreased, short-term upsides will still be limited.
■ The US and Chinese governments have reached an agreement on a substantial reduction in tariffs, but worries about the declining performance of US corporations remain.
As of last weekend, 450 companies in the S&P 500 index had released their first quarter 2024 financial reports. According to financial information company LSEG I/B/E/S, 76% of these companies reported earnings per share (EPS) that exceeded market expectations. The full-year EPS growth is anticipated to be 14.1% year-on-year (based on actual data for companies that have released results, and market expectations for those that have not), significantly higher than market expectations prior to the release of the financial reports in early April (8.0% year-on-year growth), making the overall results appear good. By industry, healthcare (from 38.3% year-on-year growth to 46.2%), communication services (from 6.2% to 31.0%), and information technology (from 16.1% to 19.1%) all surpassed expectations. In the financial reports from large technology companies, investments in artificial intelligence (AI) remained robust, with some companies indicating plans to accelerate AI investments, which garnered a positive market reaction.
Looking ahead, EPS in the second quarter (April-June) is expected to grow by 6.3% year-on-year, with growth in each successive quarter projected to be below 10%. The growth forecast for 2025 has also been cut from 10.5% in early April to 8.7%. Due to anticipated declines in crude oil prices, the EPS forecast for the energy sector has been sharply reduced from a 0.9% growth to a decline of 10.5%. Furthermore, the increase in costs and the slowdown in income growth resulting from the US government's tariff hikes, along with concerns about waning personal consumption, have significantly impacted economically sensitive sectors such as consumer stocks (from 5.3% to only 0.4%). In this context, while the expected price-to-earnings ratio (PER) fell to the 18 times range in April, it has since rebounded to around 21 times, signaling a return to a high valuation range.
The US and Chinese governments have reached an agreement to reduce elevated tariffs. According to the joint statement issued on the 12th, both sides agreed to implement the following measures before the 14th: the United States will rescind part of the 145% tariff on China, maintain the base tariff at 10%, and suspend the additional 24% tariff for 90 days. Including the added 20% tariff on illegal drugs, the total tariff for the upcoming 90 days will be 30%. China will eliminate parts of its 125% tariff on the United States and adjust the tariff rate to 10%, while the 24% tax reduction will also be suspended for 90 days. Meanwhile, tariffs on certain categories, including liquefied natural gas (LNG) and soybeans, will stay unchanged. President Trump mentioned on the 9th that an 80% tariff on China was reasonable, and the tariff level after this adjustment is significantly lower than expected. With the downside risks to the economy and corporate performance linked to the tax increase being eased, the Dow Jones Index closed above its level on April 2 (prior to the announcement by both parties) yesterday (the S&P 500 Index surpassed it on May 2). However, even if the business environment for companies has not worsened more than expected, it is challenging to assert that it has improved compared to the situation before the tariff increase. In the short term, the market may experience a rebound in stock prices due to alleviated concerns (a gradual recovery), but worries regarding the deterioration of corporate performance prospects are likely to persist through the US-China trade negotiations. Although the risk of a stock price crash has temporarily decreased, short-term upsides will still be limited.