"Corporate earnings continue to exceed expectations!" Tariffs trigger sell-off but do not change Wall Street's confidence: AI will drive U.S. stocks higher

According to the Zhitong Finance APP, last Friday, U.S. President Trump claimed that he would initiate hefty tariffs, leading to a sell-off in U.S. stocks. Meanwhile, the banking sector is about to enter earnings season, and the current stock market is still hovering near historical highs. Wall Street is looking forward to the continuation of the strong performance driven by artificial intelligence (AI) this year.

Since the low in April, the S&P 500 index has risen over 30%, with an increase of about 1,800 points; during the same period, the Nasdaq Composite Index has surged by around 50%—this six-month rebound has been impressive.

According to FactSet data, Wall Street expects S&P 500 constituent companies to report an 8% year-on-year increase in earnings for the third quarter. If achieved, this would mark the ninth consecutive quarter of growth in corporate earnings.

In this earnings season, the proportion of technology companies raising profit expectations is higher than any other sector, with software and semiconductor companies contributing most of the positive outlook.

Recently, the significant collaboration between ChatGPT developer OpenAI and chip manufacturer AMD (AMD.US) has reignited market debates about whether "we are currently in a pure bubble."

Lisa Schreiber, an investment analyst at Gradient Investments, stated last week: "Market valuations are currently high, so it is necessary to examine this situation more closely." "However, I do not believe we are in a bubble state right now, as the fundamentals of companies are solid, and these companies' earnings levels are exceeding expectations every quarter."

Nicholas Colas, co-founder of DataTrek Research, pointed out in a recent report that the current dynamic price-to-earnings ratio of the S&P 500 index (based on expected earnings for this year) is about 25 times, a level that "reflects the market's full confidence in corporate earnings meeting expectations, and even includes expectations for exceeding them."

Goldman Sachs analysts also stated last week that the market is not currently in a bubble, citing that "the leading companies with significant gains generally have exceptionally strong balance sheets."

Meanwhile, UBS analysts expect global capital expenditures in the artificial intelligence sector to grow by 67% year-on-year by 2025. The UBS strategy team wrote in a report on Thursday: "In our view, this round of stock market rebound still has three major supports: solid corporate fundamentals, accelerated penetration of AI applications, and an overall favorable macro environment. Investors should consider gradually increasing their positions during any market pullbacks."

However, as of now, the market has hardly shown any pullback opportunities for "buying the dip." The core sectors of the AI boom, including technology, communication services, utilities, and industrials, are all hovering near historical highs. Moreover, Wall Street strategists continue to raise their target points for the S&P 500 index.

Nevertheless, not everyone is fully convinced. Jim Masturzo, Chief Investment Officer of Multi-Asset Strategies at Research Affiliates, stated: "In our view, U.S. stocks are still overvalued, and this overvaluation has persisted for a long time." He added, "We are starting to feel that investors are hoping for lower interest rates and monetary policy adjustments, believing that these factors can support the continuation of the current market."

The latest policy meeting minutes released by the Federal Reserve on Wednesday indicated that if the labor market remains weak, officials are inclined to cut interest rates again this month and may do so once more before the end of the year.

The loose monetary policy environment and high stock market may have alleviated consumer concerns to some extent. Delta Air Lines (DAL.US) reported its earnings last Thursday, showing growth in both its premium travel and domestic route businesses; in the first half of this year, business travel demand was weak due to adverse factors related to tariffs, but this segment has now rebounded.

Delta Air Lines CEO Ed Bastian stated, "I am pleased to report that business has quickly rebounded in the third quarter, and the company is steadily moving towards its expected goals for the year."

Nevertheless, Wall Street is still closely monitoring any signs of pressure on consumers. Last Friday, U.S. President Trump announced that starting in November, an additional 100% tariff will be imposed on Chinese goods. Previously, while businesses faced challenges, the overall environment remained largely controllable, and this move has added new uncertainty to the market.

Cindy Beaulieu, Chief Investment Officer for North America at Conning, stated, "We have not yet seen a significant transmission effect of tariffs on inflation." "This means that some companies are already facing pressure in dealing with the impact of tariffs, and there has been a certain degree of margin compression. Therefore, the growth rate of corporate earnings in the third quarter may slow slightly, but there is currently no risk significant enough to trigger alarms."