4-8-25: Time to Brace for Earnings Season – And Much-Needed Tariff Guidance

by Bryan Perry

April 8, 2025

Those of us who contribute to Market-mail are required to submit these columns by Sunday afternoon, so we don’t have the luxury to react to how the market will trade on Monday – whether the current correction deepens, or the market begins to recover. Friday’s session, which saw the Dow drop 2,200 points felt like “capitulation day,” in that defensive stocks that were seeing bullish rotation were sold off aggressively.

Shares of utilities, consumer staples, gold, telecommunications, insurance providers, and, to some extent, healthcare REITs, all succumbed to the cascade of indiscriminate selling pressure by investors looking to raise cash going into the weekend. When defensive stocks start selling off aggressively, it can signal a market bottom, or several different things, depending on the broader market context.

Market bottoms are notoriously difficult to time, but watching investor sentiment, economic indicators, and earnings trends can provide clues. Investor sentiment is in the tank, economic indicators are stable, inflation ticked higher, and earnings are now on deck. In the S&P 500, 68 out of 107 companies that provided earnings guidance so far have issued negative EPS guidance, well above multi-year averages.

The swiftness with which the major indexes have declined, to where investors threw in the towel on the most defensive stocks Friday, following several weeks of steady selling, raised the question of whether a tradable bottom is in or if there is more downside ahead. One can look at this scenario in different ways:

• We May Be Near a Market Bottom: If defensive stocks are being sold alongside everything else, it could indicate capitulation – a time when investors panic and sell indiscriminately. This often happens near market bottoms, as fear peaks and liquidity dries up. Historically, broad-based selling, including defensive stocks, has sometimes preceded a rebound.

• Further Correction May Be Ahead: On the other hand, if defensive stocks are selling off while growth and cyclical stocks are already down, it might suggest investors are shifting out of safety and into cash, fearing deeper declines. This could indicate that the correction is still unfolding.

Here is a sample of how the largest market swings worked out last year, and in the last 45 years:

Sources: Standard & Poor’s, Bloomberg Finance L.P., Fidelity Investments.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

As a welcome relief from the tariff news, this week will usher in first-quarter earnings season, featuring results from money center banks on Friday, the first “tell” on the state of businesses and consumers.

For the next two weeks, companies will continue to report – relentlessly. At this point, the bar is very low, given the substantial declines in share prices that have now hit all 11 market sectors.

For the market to stabilize and attract buyers back into this fear-filled environment, one can assume that companies will have to address what level of impact tariffs will have on their businesses. To fail to include tariff-related guidance will invite further uncertainty and probably further selling pressure, so CEOs and their teams will have to take the time to crunch the financial scenarios that are specific to their businesses.

Source: bigcharts.com

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The level of uncertainty is sky-high, so earnings season will need to deliver a level of clarity that sends a clear message that tariffs are priced into this 17.5% correction for the S&P 500 from its peak of 6,147 on February 19 to Friday’s close of 5,074. Trading volume last Thursday and Friday was through the roof, typically a sign of real panic. The CBOE Volatility Index (VIX) exploded higher, closing at 45.31.

This kind of reaction has historically been the stuff of market bottoms. We’ll hope that history repeats itself and earnings season is the salve that heals a wounded bull. One other, maybe more important catalyst, would be some real give and take on tariffs – meaning agreements to radically lower tariffs.

Elon Musk has proposed that the U.S. and E.U. drop tariffs to zero and let free trade determine winners and losers. In theory, free trade is meant to eliminate tariffs and other trade barriers, allowing goods and services to move across borders without additional costs imposed by governments. However, in practice, free trade agreements (FTAs) can still include some tariffs, especially during transitional periods or for sensitive industries. Some FTAs gradually phase out tariffs rather than eliminating them immediately.

Certain industries, like agriculture or manufacturing, may have exceptions or protections built into agreements. If a country violates trade rules (like dumping products below cost), retaliatory tariffs can still be imposed even within a free trade framework. So, while free trade aims to minimize tariffs, real-world trade policies are often more nuanced. The main thing is to see the trend reverse course and start moving toward free trade being phased in, which would stop the bleeding and propel stocks higher.