The Q2 earnings season for US stocks kicks off: Market expectations for a sharp decline in profits, tariffs become a key swing factor, and four major themes worth 关注

The second quarter earnings season for U.S. stocks has officially kicked off, with market expectations significantly cooling. Investors are facing the dual challenges of a sharp slowdown in profit growth and uncertainty surrounding tariffs.

According to data released by FactSet on July 3, analysts expect the earnings of S&P 500 constituent companies to grow by 5% in the second quarter—this would be the slowest profit growth since the fourth quarter of 2023.

Despite the peak of tariff-related uncertainties in the second quarter, the recent market rebound suggests that the performance of companies to be announced in the coming weeks may be underestimated. Bank of America recommends that investors focus on four major themes: capital expenditure guidance, layoffs, foreign exchange impacts, and the effects of the Inflation Reduction Act.

Tariff Impact, Earnings Expectations Significantly Downgraded

According to data released by FactSet on July 3, analysts expect the earnings of S&P 500 constituent companies to grow by 5% in the second quarter—this would be the slowest profit growth since the fourth quarter of 2023, a significant drop from the strong 13% growth in the first quarter. Among the 11 sectors, 6 are expected to achieve year-on-year growth, with the communication services and information technology sectors leading the way. 5 sectors are expected to see year-on-year declines, with the energy sector experiencing the largest drop.

According to reports from the Wind Trading Desk, Bank of America analysts stated in a report on July 13 that since April, due to the announcement of tariff policies and unexpected weakness in economic data, the extent of analysts' downgrades has exceeded normal levels. Over the past three months, the extent of downgrades to second-quarter expectations by analysts has reached 4%, higher than the historical average of 3% for typical quarters.

However, companies that released earnings early have performed strongly, of the 21 S&P 500 companies that have reported results, 71% exceeded expectations on earnings per share, 81% exceeded expectations on sales, and 67% exceeded expectations on both metrics—this is the best performance for early reporters since the second quarter of 2021.

Considering that the situation where S&P 500 earnings per share fall short of expectations has only occurred twice in the past decade, Bank of America currently expects second-quarter earnings per share to slightly exceed expectations by 2% (reaching $64, a year-on-year increase of 6%).

Narrow Growth Range

Bank of America stated that the growth range for U.S. stocks this season is expected to be narrow, with negative growth when excluding the technology and communication services sectors.

Analysts currently expect that the technology and communication services sectors will drive earnings growth this quarter, with the two sectors combined expected to grow by 20%. However, excluding these two sectors, S&P 500 earnings growth is expected to be negative 3%. Only 5 of the 11 sectors are expected to achieve positive growth, a significant decrease from 8 in the previous quarter The expected revisions for large technology companies remain the strongest, delaying the convergence of growth rate expectations between the "Seven Sisters" and "the other 493 companies" until 2026.

Corporate Guidance Trends Improve, Tariff Impact Becomes a Key Swing Factor

Bank of America stated that after a weak start at the beginning of the year, recent performance guidance for U.S. stocks has improved: the three-month guidance ratio (the ratio of the number of earnings per share guidance exceeding expectations to those below expectations) has now rebounded to an average level of 0.8 times.

Although a few companies have withdrawn their performance guidance, it is far from the information vacuum experienced during the COVID-19 pandemic: in the last quarter, nearly 30% of S&P 500 constituent companies provided annual earnings per share guidance, while this proportion was only about 10% in the second quarter of 2020. Despite high policy uncertainty, the dispersion of earnings per share (a measure of earnings uncertainty) remains remarkably low compared to historical levels.

However, the uncertainty surrounding tariff agreements remains a key volatility factor. Bank of America estimates that without any mitigation measures, tariffs could have about a 5% direct impact on the operating income of the S&P 500.

According to Bank of America's global research survey, 25% of fundamental analysts expect price increases to cover most of the tariff increases, 21% expect companies to struggle to raise prices, and the remaining 54% expect some degree of price increases and margin compression. Capital-intensive industries are more likely to pass tariffs onto end consumers.

Four Key Themes to Watch

Bank of America suggests that investors focus on four key themes: capital expenditure guidance, layoffs, foreign exchange impacts, and the effects of the "Great American Rescue Plan."

In terms of capital expenditure, Bank of America currently expects the proportion of CEOs increasing capital expenditures over the next six months to drop to 28% in the second quarter, the lowest level since the COVID-19 pandemic.

However, in the context of uncertainty, the performance of hyperscale technology companies remains strong at least for now. Hyperscalers continue to emphasize that the AI investment cycle remains fully active. This group saw a 62% year-on-year increase in capital expenditures in the first quarter and is expected to grow by 37% in 2025, far exceeding the 4% expected growth for the rest of the index.

Statistics show that in the first quarter of 2025, the capital expenditure of S&P 500 constituent companies remained at a moderate level of around 15%, with nearly 90% of the growth driven by the "Magnificent Seven" (Mag 7) and the technology sector. Although the capital expenditure growth in other market sectors is low, it remains positive.

Bank of America believes that this earnings season can closely monitor whether there are further signs of slowdown, but a positive signal is that there has not been a significant increase in companies mentioning project delays during earnings call conferences.

Overall, the risk of layoffs remains manageable at present.

Although layoffs increased at the beginning of the year, they have declined in recent months. The frequency of mentions of layoffs among large U.S. companies remains relatively low. In the first quarter earnings call conferences, companies discussed tariff mitigation strategies primarily focused on pricing and procurement shifts rather than layoffs.

In terms of foreign exchange, Bank of America statistics show that for every 10% depreciation of the dollar, U.S. stock EPS will increase by 3%. With the continued decline of the dollar, it is estimated that foreign exchange will provide a boost of 60-70 basis points in the second quarter, compared to a resistance of 110 basis points in the first quarter. By sector, technology stocks are expected to receive the largest boost (130 basis points), followed by materials stocks (90 basis points).

The impact of the Inflation Reduction Act (OBBBA) will also become a focus, although tariff and deficit issues still mean that inflation and interest rates face limited relief, and free cash flow remains crucial