Even a Fed Cut Won't Save Growth Now
Here's why a quarter point in September would do little to thwart slowing earnings growth in the quarters ahead.
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All eyes will be on Jackson Hole today as investors try to triangulate the probability of their long-anticipated cut to the Fed Funds rate at the next Federal Open Market Committee meeting in mid-September. This has been quite in flux in recent weeks. A a quarter-percentage point interest rate reduction might keep investors’ enthusiasm stoked and help on the margins with the moribund housing market. But it will do little to alleviate an evolving trend in the market.
The trend is that earnings growth appears to be harder to come by in the quarters ahead. FactSet now has S&P 500 earnings growth coming in at only 7% on a year-over-year basis in the third and fourth quarters of 2025. This is down significantly from earnings growth of the low- to mid-teens over the past several quarters. It is also important to note that the majority of this growth is powered by the Magnificent Seven. Much more paltry profit growth is being delivered by the "S&P 493."
There are myriad challenges for earnings growth right now. Gross domestic product growth in the U.S. was approximately 1.25% in the first half of the year. In addition, global growth is quite anemic right now. There are a couple of more recent headwinds to earnings as well. Obviously, the first one is from new tariff policies. To this point, companies have largely swallowed a large chunk of these additional levies.
Walmart WMT, was another major American icon disclosing tariffs had significant impacts on second quarter results on Thursday. Manufacturing is seeing major negatives from tariffs. General Motors GM took a $1.1 tariff impact in the second quarter and projects the total tariff cost to the company in fiscal 2025 will be between $4 billion to $5 billion. To put this in perspective, GM’s annual net income from 2022 to 2024 averaged just under $9 billion. Ford F believes it will see a $3 billion hit from tariffs this year and Deere & Co DE also is projecting significant tariff costs.
In addition, the dollar index has fallen around 10% in 2025. This is going to reduce earnings from overseas revenues for American multi-nationals. A weaker greenback is also a headwind to bring inflation down further. Fuller impacts from tariffs are likely to be felt in the third and fourth quarters. New levies from new trade agreements will go into place and all the inventory many firms front loaded in the first quarter by taking exports early to beat tariffs will burn off.
With the market priced at nearly 24-times fiscal 2025 expected S&P 500 earnings, this reality does not seem priced into equity markets. There will be pockets within the market that should be able churn solid earnings growth despite this increasingly challenged environment. Some healthcare and biotech stocks look capable of that and are still sporting reasonable valuations. I will be highlighting a major pharma play in my Sunday covered call trade idea and Monday I will profile several small and mid-cap names that fit that bill as well.
How the overall market manages lower earnings growth ahead is an open question. But investors should brace for a September and October that could get rocky as this reality sets in.
At the time of publication, Jensen had no position in any security mentioned.
