Earnings Drive Stock Prices—Consolidation Needed

by Chris Galipeau of Franklin Templeton, 8/7/25

Macro

  • The US economy is resilient, but it is also slowing. GDP for the first half of the year grew at a 1.25% annualized rate. That is well below last year’s 2.50% pace and also below long-term trend growth of about 2%.
  • Consumer spending is also slowing. What caught my attention in the July 30 FOMC press conference was Federal Reserve (Fed) Chair Jerome Powell stating, “Economic growth is not part of our mandate.” That’s true, but I question whether that implies the Fed is focused on full employment and stable prices and not at all worried about an economy that is slowing.
  • Either way, the Fed seems to be content to sit tight and watch the data come in before making a judgment on whether to cut rates or not. Two-year note yields generally lead Fed policy. As of this writing, the two-year yield is 3.95%, roughly 25 basis points (bps) below the 4.25% lower federal funds (FF) rate boundary. The bond market is suggesting the Fed is too tight and risks being late to cut rates. The July nonfarm payrolls (NFP) number (+73,000) should ring some alarm bells. (Source: US Bureau of Labor Statistics.)
  • FF futures made big moves during Powell’s post-meeting press conference. At the beginning of his presser, the market was indicating a 66% chance of a cut in September and a 69% chance of a cut in December. By the time he finished speaking, those odds had moved down to 41% for September and 61% for December. On the heels of the NFP data, the odds for September jumped to 72% and to 69% for December.

Equities

  • Interesting action on Thursday: On the heels of phenomenal earnings reports from both Meta (META) and Microsoft (MSFT) Wednesday night, the tape opened Thursday at the high tick for the day. The market bled steadily after that, and the S&P 500 Index essentially closed on the lows. When a stock or an index trades through the prior day’s highs and closes below the prior day’s lows, technical analysts, who study price/chart patterns, call it an “Outside Reversal.” An analyst using a type of chart called a candlestick chart would describe it as a “Bearish Engulfing Candle.” In either case, that type of price action usually signals exhaustion and a trend change. This could be the start of the consolidation I think we need after a 30% rip from the April lows. I would think of it as a pause that refreshes.
  • Let’s talk earnings. The Q2 earnings season has been positive in general, but we are also seeing the first signs of tariff-related misses. I continue to be of the mindset that the biggest risk to the market comes from earnings misses. And with valuations at 24x 2025 EPS and 24x next-12-month EPS, there is not a lot of room for mistakes. META and MSFT blew it out in spectacular fashion and helped pull the Magnificent Seven (Mag 7) into the leadership spot for the year-to-date (YTD), but there were a handful of disappointments as well.
  • Sherwin Williams, Whirlpool, Conagra, Texas Instruments, Stanley Black and Decker, Hershey, Adidas, Puma, General Motors, Shake Shack, Budweiser, and Ford all suffered from tariff-related cost pressures and/or weakening in consumer spending. Most of those stocks did not react well to those misses. Most companies are eating the increased costs of goods sold (COGS) so far.
  • Mixed earnings results offer a timely reminder that this is a stock-pickers’ market. It has been all year (actually, for the last 16 months) and will continue to be, in my view. Active management should be able to deliver relative alpha in this environment. In fact, through Q2, 51% of active managers are beating the S&P 500, versus just 10% of active managers beating the S&P 500 over the last decade. (Source: Morningstar.)
  • The death of the US dollar is greatly exaggerated. The dollar index (DXY) has rallied about 4% from its recent lows, putting the dollar back to the levels of early April, when the storm hit. This seems to be putting a tad bit of pressure on foreign equity markets. Should this continue, we would favor adding to European/emerging markets (EMs) equities. Forward earnings power for 2025 and 2026 is stronger in Europe and EMs than in the United States. We have the data and would be more than happy to share it with you.