- Fourth quarter earnings results have been impressive so far, but it’s early.
- The still unclear impact of future tariffs may have affected the results.
- Here’s how UBS says investors can navigate an extremely confusing time in the markets.
The companies have delivered strong fourth-quarter earnings results so far, but investors should probably take them with a grain of salt.
Corporate earnings are easily clearing the mid-single-digit growth bar that analysts had set. Earnings rose about 9% year-over-year in the first week of the fourth-quarter reporting period, according to Bank of America, and that pace appeared to hold steady in the second week.
Early earnings rose at a high single-digit rate, both UBS and Bank of America revealed. UBS
Another promising sign is that more firms are beating estimates. Over 80% of stocks have topped sales and earnings estimates, BofA recently found, compared to 73% at this point in Q4 2023.
Both UBS and Bank of America noted that most companies beat earnings estimates. UBS
US stocks have hit all-time highs on the back of the news, as well as enthusiasm for what many see as President-elect Trump’s pro-business policies.
Investors may want to keep their enthusiasm in check for several reasons, the most obvious being that it’s still very early in the fourth quarter earnings season. Mega-cap stocks like Amazon, Apple, Meta and Microsoft report next week and may need to bid to keep the market afloat.
But even if earnings remain strong, they may not necessarily be a sign of things to come.
Tariffs will “muddy the waters” of Q4 results
These fourth-quarter results may be the most difficult to interpret in recent memory, strategists at UBS Global Wealth Management wrote in a mid-January note.
Earnings could be artificially boosted if companies or consumers are buying more than usual ahead of the tariffs Trump is expected to implement in the coming weeks, UBS said. But the opposite may be true, as all the uncertainty could have delayed major purchases.
“In some industries, it is possible that investors will be skeptical of strong results if they reflect pre-buying ahead of potential charges,” UBS GWM strategists wrote. “In other industries, companies may delay plans until the rate picture becomes clearer.”
Either way, last quarter’s earnings could help both optimists and pessimists strengthen their case. Bulls may point to strong results in the face of the uncertainty this new administration brings, and bears may say that buying was disproportionately strong and is destined to reverse.
There is much debate over whether Trump’s tariffs would be net positive or negative, though it’s hard to deny that they will “muddy the waters” for earnings, as UBS strategists put it.
David Lefkowitz, UBS GWM’s head of U.S. equities and lead author of the note, recently told Business Insider that he is listening to companies’ post-earnings comments for information about contingency plans for fees, particularly for consumer discretionary firms and industrial.
“I don’t think there will be many answers,” Lefkowitz said in an interview.
He added: “The only thing we have to go on is the feedback from the management teams, and that’s also somewhat speculative. I mean, they might ask their customers, ‘Well, why are you doing what you’re doing?’ But beyond that, they might not get a clear message, so I just think it’s going to be a little louder.
Until that point, consumer goods giant Procter & Gamble did not mention the charges in its Jan. 22 earnings call. When asked about the potential tariffs, CEO Jon Moeller told CNBC that “we’re fans of free trade, but we’re going to do the best we can with those kinds of initiatives on our backs.”
Trump has said which countries he plans to impose tariffs on, but it is unclear whether those countries will respond by making concessions or implementing their own import taxes. However, Lefkowitz said that if there are counter-tariffs, consumer-focused companies like P&G could be spared.
“We’re also somewhat skeptical that Trump will continue with tariffs on consumer products,” Lefkowitz said. “This is where the consumer would feel the most direct impact, and it was chosen in part based on the high cost of living.”
How to invest in light of fees
Tariffs could become the main story in the markets this year, although Lefkowitz said they are not yet.
“It’s all very much in the margin,” Lefkowitz said when asked how the pulled expenses have impacted fourth-quarter earnings, adding that it’s not “dramatic in terms of moving the needle.”
On the other hand, Lefkowitz and his colleagues say investors can stick with it big hats over smaller stocks due to their superior earnings and AI exposure. Moreover, larger companies are less affected by higher interest rates for longer, as UBS strategists previously pointed out.
Both growth and value stocks can work against this backdrop, Lefkowitz believes, though his team is most excited about information technology stocks and communication services companies. of consumer discretion, FinanceAND communal services the sectors also have positive evaluations. The tariffs could hurt some consumer-focused firms, Lefkowitz said, but he’s not losing sleep over them.
“We don’t think the tariffs will be a big deal for those companies, for the most part,” Lefkowitz said.