Earnings & Buybacks Q2

Q2 earnings season ramps up next week as the banks lead off. With earnings as the market’s key catalyst, investor attention will turn to results and forward guidance. The bar has been lowered—now it’s a question of who clears it and how convincingly.

Q2 Earnings

The Q2 season begins under a cloud of reduced forecasts driven by tariffs, slowing global demand, and muted corporate guidance. Nonetheless, technical tailwinds and record levels of share buybacks have helped support equity markets. Earnings growth, while positive, is increasingly concentrated in a narrow group of large-cap names—raising questions about the breadth and durability of the rally.

Over the last few months, according to data from S&P Global, the Q2-2025 earnings estimates have declined from $234/share in the original March 2024 estimate to $220/share as of June 15th. That $14 drop in estimates is partially driven by tariff-related concerns on corporate outlooks.

According to FactSet:

“Heading into the end of the quarter, analysts have reduced earnings estimates for S&P 500 companies for the second quarter more than average. However, the percentage of S&P 500 companies issuing negative earnings guidance for the second quarter is less than average. As a result, estimated earnings for the S&P 500 for the second quarter are lower today compared to expectations at the start of the quarter. In addition, the index is expected to report its lowest year-over-year earnings growth rate since Q4 2023 (4.0%). In terms of estimate revisions for companies in the S&P 500, analysts have lowered earnings estimates for Q2 2025 by a larger margin than average. On a per-share basis, estimated earnings for the second quarter have decreased by 4.1% to date. This decline is larger than the 5-year average (-3.0%) and the 10-year average (-3.1%) for a quarter.”

We also see the same downgrade in estimates from Goldman Sachs’ recent assessment, where Q2 is expected to generate only a 4% growth in earnings. According to Goldman Sachs, what matters for investors is that the expectations bar is low (down to 4% from 12% in Q1), and it will be cleared. At a high level, the focus will be on the impact of tariff policies on margins, sales, and investment spending.

Again, many of those negative revisions are tied to concerns over tariffs under the current Administration, and the lack of finalized trade deals keeps forward estimates a big question. However, as we move into Q3 and Q4 of this year, there should be sufficient resolutions to stabilize forecasts.

Why Estimates Are Being Cut More Sharply

Primary factors to explain the steeper-than-normal downward revisions in Q2-2025 earnings.

Rising trade risks: Trump’s tariff actions renewed mid‑year jitters. Industry groups and strategists at Goldman, Bank of America, and Citi warn tariffs may shave off ~1–2% EPS growth per 5pp increase in effective duty rates. While tariffs are on pause, that “pause” expires July 7th. We fully expect that pause to be extended into Q3, given the Administration has deals currently in progress.

Weaker consumer spending: Our most significant concern for Q2-2025 earnings and the rest of the year is slowing economic growth, which will spill over into consumer spending. There is a high correlation between Personal Consumption Expenditures (PCE) and earnings. PCE is one of the better measures for developing a framework for future earnings growth, since they comprise nearly 70% of the economic equation. The annual percentage change in forward earnings tracks the yearly percentage change in PCE fairly closely.

Goldman suggests that the current expectation is that consumers will take the brunt of the tariff cost burden (economists think they will absorb 70% of the cost). However, that may not be the case as seen in the latest inflation reports. If that is the case, corporate margins could have a more severe impact. Still, we won’t know that impact until we get further into earnings season and hear from companies like Apple (AAPL) with a significant exposure to international sales.

Goldman makes an interesting point:

“Of course, with inflation not budging, the implication is that consumers haven’t borne the brunt of the tariff cost burden, as in any of it, and since corporations aren’t issuing profit warnings, the conclusion is simple: foreigners are paying the tariffs, just as Trump said they would.”

We will see if that continues, but the tariffs have not been the disaster Wall Street expected. Nonetheless, the negative revisions are tied to concerns over tariffs under the current Administration, and the lack of finalized “trade deals” keeps forward estimates in question. However, as we move into Q3 and Q4 of this year, the expectations are for a sharp increase in earnings in 2026, as shown.

The foundation of that anticipated surge lies in stronger economic growth and a revival in consumer spending. Yet risks loom large, with rising delinquency rates, high interest rates, and tightening credit conditions all threatening the narrative. Any deterioration in macro data will force further downward revisions.

Buybacks

Looking ahead, continued support from corporate buybacks also remain a key pillar for markets and earnings. In fact, announced and executed buybacks have surged in recent months to all time highs, with total repurchases on track to exceed $1 trillion by year-end.

Unsurprisingly, markets often perform well during periods when company buybacks are most active. As buybacks currently surge just south of 14%, we can see very similar activity at the end of 2022, acting as a key role in stabilizing sentiment and driving market performance during the recovery.

A high correlation exists between the 4-week percentage change in buybacks and the stock market. More importantly, since the act of share repurchases provides a buyer for those shares, the .85 correlation between the two suggests this is more than just a casual relationship.

While buybacks offer short-term market stability, a sustainable earnings recovery will ultimately require a more robust economic backdrop, healthier consumer balance sheets, and clearer trade policy direction. For now, we remain cautious on all three fronts.

How We Are Approaching Earnings Season

• Focus on structurally advantaged sectors: Stick with tech as they drive the market. AI heavy-weights carry forward earnings momentum, and guidance around AI spending could prompt positive sentiment . On the other hand, avoid high-beta cyclical stocks, which may underperform if tariffs spark volatility.

• On the lookout for defensive exposure: As equity valuations remain elevated, despite slowing economic forecasts, adding exposure to low‑volatility and dividend‑generating segments, can add protection. We expect to see some rotational trends in the near future.

• Watch guidance tone, not just numbers: With ~4% of S&P 500 firms pulling guidance commentary last quarter, we expect companies to express some uncertainty Q2 calls. Monitor commentary from discretionary and cyclical firms for warnings or downward momentum beyond base estimates.

• Expect upside surprises, but remain realistic: Historically, 75–77% of S&P 500 firms top EPS expectations, due to the deep cuts of estimates going into earnings season. However, with consensus estimates already cut deeply, a high beat rate is likely.

• Retain domestic vs. international exposure: The powerhouse of earnings growth remains the U.S. versus the rest of the world. With Central Banks cutting rates globally to offset sluggish economic growth, the backdrop of U.S. earnings will remain attractive to investors globally.

The Bottom Line

Ultimately, while corporate buybacks continue to provide critical market support in the near term, the sustainability of the earnings rebound will depend on a healthier economic backdrop, improved consumer balance sheets, and greater clarity on trade policies in the months ahead.

Q2 earnings season opens with lowered expectations, softer guidance, and growth increasingly concentrated in a handful of names. Historically, positive surprises tend to outpace negativity, offering upside potential if macro headwinds remain stable.

Our primary concern remains the slowing growth trend in the economic data. That trend, combined with rising delinquency rates, tightening credit conditions, and declining consumption, all suggest that monetary policy is too restrictive and the Federal Reserve is likely behind on cutting rates.

Nonetheless, the market keeps triggering more bullish scenarios, and we will continue to cautiously follow momentum where it is present.