If you are wondering why the S&P 500 Index has held up so well in the past two months, look no further than the technology and communications sectors, which collectively account for nearly half of the index by weighting. For all the wild and headline-grabbing swings in trade policy since early April, analysts have continued to project more than 14% earnings growth in those combined sectors this year — an outlook that really hasn’t budged. Wall Street isn’t ignoring the potential risks from tariffs and a consumer slowdown, analysts just think that America’s innovation superstars will partially offset any damage.
And reasonably so. Artificial intelligence posterchild Nvidia Corp. said Wednesday that it had $44.1 billion in revenue in the latest quarter, up an extraordinary 69% from a year earlier. Microsoft Corp., the index’s biggest company by weighting, posted a 20% increase in cloud revenue last quarter, showing why its software-heavy model leaves it relatively insulated from tariffs. And Netflix Inc., which successfully hiked subscription prices recently, said revenue jumped 12.5%, reaffirming the resilience of its business model.
None of this is to say that all is fine and dandy in the economy, but there’s clearly a compositional element to the perceived strength of the main equity index. In addition to the sector weightings issue, my Bloomberg Opinion colleague Nir Kaissar has pointed out that the companies with the heaviest weights also tend to enjoy extraordinary pricing power that will serve them well in the face of a trade war. That partially explains why the S&P 500 is back within spitting distance of its all-time highs, even as small-caps and mid-caps are still down about 17% and 11%, respectively.
But even for large cap stocks, the index outlook can be somewhat deceiving. Consumer discretionary earnings forecasts haven’t held up quite so well since President Donald Trump left markets in a tizzy with his April 2 “Liberation Day” tariffs on countries around the world. According to data compiled by Bloomberg Intelligence, Wall Street analysts now expect the S&P 500’s consumer discretionary sector to post a 1.2% earnings drop this year. Prior to April 2, analysts expected discretionary growth of 4.5%. The outlook for the consumer staples sector has also been revised sharply lower. The revisions reflect a weaker revenue environment and — for discretionary in particular — narrower profit margins.
The question now is what comes next. On the positive side, the US Court of International Trade ruled Wednesday that many of President Trump’s tariffs are illegal. But as Goldman Sachs Group Inc. wrote, the ruling “might not change the final outcome for most major US trading partners.” A federal appeals court Thursday paused the Court of International Trade’s ruling, and the White House plans to appeal to the Supreme Court.
