Under the Prosperity of Earnings Season, Hidden Currents: RBC Warns Tariffs Remain a Sword Hanging Over U.S. Stocks

According to Zhitong Finance APP, despite a strong start to the U.S. earnings season this quarter, the strategist team from RBC Capital Markets believes it is too early to rule out the impact of Trump's tariff policies on U.S. inflation and corporate profits. Led by Wall Street's top strategist Lori Calvasina, the RBC strategy team stated that preliminary trends show U.S. companies have demonstrated resilience against the new round of trade war initiated by Trump. However, RBC indicated that its survey revealed warnings from executives of several large U.S. companies that the impact on profits will become more apparent in the second half of this year.

"It is premature to assume that tariffs will not create inflationary pressure," wrote Calvasina and other RBC strategists in a research report released on Sunday, coinciding with the announcement of a formal trade agreement between the EU and the U.S. "If U.S. companies' profit outlook for the second half of the year and 2026 is not as optimistic as investors have been expecting under the heavy burden of tariffs, it will pose a significant risk of correction to the record-high U.S. stock market."

As retail and institutional investors bet on continued strong growth in U.S. corporate profits, the U.S. stock market has rebounded to historical highs, with multiple trading days setting new records. According to data compiled by Bloomberg Intelligence, approximately 82% of S&P 500 companies have exceeded Wall Street's expectations for overall earnings in the second quarter of the earnings season so far, marking the highest percentage of positive surprises in nearly four years.

The U.S. stock market is easily surpassing low general earnings expectations—analysts' forecasts remain at their lowest level since the end of 2023.

The consensus reached in trade between China and the U.S., as well as between the U.S. and Japan, along with the latest progress in U.S.-EU trade negotiations, has also boosted market risk appetite. In the latest trade agreement announced on Sunday, Washington and the EU reached an accord where most EU exports will face only a 15% tariff, far lower than the 30% general tariff initially threatened by Trump. Meanwhile, the EU will increase its investment in the U.S. by $600 billion compared to before, and will purchase U.S. military equipment and $750 billion worth of U.S. energy products.

In contrast to RBC's cautious outlook, some market forecasters, including Michael Wilson, Chief Equity Strategist at Morgan Stanley, have turned more optimistic about the S&P 500 index, expecting strong profit growth to continue. Morgan Stanley previously raised its target price for the S&P 500 index significantly to 7,200 points, expected to be reached by mid-2026.

On Monday, John Stoltzfus, Chief Strategist at Oppenheimer & Co., raised the year-end target for the benchmark index to 7,100 points—this is the highest S&P 500 forecast among the strategists tracked by institutions, second only to the 7,000 points given by Wells Fargo's strategist team 007 Year-end target point expectations.

However, other Wall Street strategists, including Bhanu Baweja from UBS Group, have previously warned that even with the tariff increases, the market's expectations for corporate profit margins to be protected are overly optimistic, and they anticipate that U.S. stocks will enter a correction trajectory in the second half of the year.

Wall Street financial giant JP Morgan has issued a warning that the global stock market—especially the U.S. stock market—may experience significant cracks in the second half of the year. The team of quantitative strategists led by Khuram Chaudhry at JP Morgan has cautioned that the global stock market—particularly U.S. stocks—has shown signs of complacency, as major regional stock markets led by U.S. stocks continue to hit historical highs while the Federal Reserve maintains high interest rates and tightens liquidity through balance sheet reduction, alongside a rapid downward revision of corporate earnings.

In its latest macro outlook, JP Morgan also warned that a new round of tariff policies will push U.S. inflation back up in the second half of 2025; JP Morgan also expects that tariffs combined with other policy frictions will drag U.S. economic growth from "moderate expansion" to "stagflation-like slowdown," significantly raising the probability of recession. The bank's chief economist team has lowered its forecast for the annualized quarterly GDP growth rate in the second half of 2025 from 2.0% to 1.3%, while assigning a 40% probability of recession, and believes that core inflation may again drift away from the Federal Reserve's anchored 2% target.

Global asset management giant BlackRock expects that despite the stubborn service sector inflation in the U.S. easing somewhat, the effects of tariffs will still push inflation higher in the second half of this year, becoming a dominant force in the market