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Investors would be wise to be on high alert for negative market surprises over the next few months, given renewed optimism on stocks amid the US-China trade thaw.
They just got one in the form of the US losing its sterling triple-A credit rating. Moody’s downgraded the US government late Friday, blaming large fiscal deficits and rising interest costs. Stocks across the board on Monday sold off sharply as the 10-year Treasury yield (^TNX) rose above the key 4.5% level.
Another market surprise lying in the weeds is the third quarter earnings season, which typically begins in mid-October. Pros think the cumulative effect of tariffs will be most severe in the third quarter, much to the dismay of upbeat analysts who continue to expect bumper corporate profits.
"I think there's a lag between the tariff announcements and when they actually hit the earnings," Trivariate Research founder Adam Parker said on Yahoo Finance's Opening Bid podcast (see video above or listen below). "So I suspect it's more likely that third quarter numbers that are going to soften a little bit."
Parker held the chief US equity strategist role at Sanford Bernstein and Morgan Stanley before founding Trivariate Research in 2021. He correctly predicted the sell-off in "Magnificent Seven" names — Nvidia (NVDA), Apple (AAPL), Amazon (AMZN), Tesla (TSLA), Microsoft (MSFT), Meta (META), Alphabet (GOOG) — this year, putting out a bearish note in early February before the slide in the closely watched group.
Parker added about earnings that "you could get a little bit of a wave where not everyone misses at the same time. But I currently think the Q2 numbers are probably OK, but the third and fourth quarter numbers are actually embedding in some sectors higher than normal [earnings]."
Read more: How to protect your money during economic turmoil, stock market volatility
The second quarter earnings season, which is coming to a close soon, has lulled investors into a false sense of security about the profit impact of tariffs. Tariffs won't initially be felt by companies until the current quarter, and then they will be felt more in the third quarter if they stay at current levels.
About 78% of S&P 500 (^GSPC) companies have reported a positive earnings per share (EPS) surprise for the first quarter, above the five-year average, according to data from FactSet. S&P 500 companies are exceeding EPS estimates for first quarter results by roughly 8.5% in the aggregate, relatively in line with the five-year average.
