Market Bulls Fight Off Uncertainties

The backdrop for the market is growing more challenging by the day. The attack on Iran’s nuclear enrichment sites is only the latest major story for investors to contend with. The recent tariff deal with China that imposes an average 55% tariff on imported Chinese goods has the Fed squirming to the point that Fed Chair Powell warned of rising inflation in the second half of 2025. And yet, the Fed sees the likelihood of two rate cuts. Go figure.

Russia has escalated its attacks on Ukraine, particularly with intensified missile and drone bombardments. This increase in aerial assaults coincides with a Russian summer offensive on eastern and northeastern sections of the front line. And uncertainty surrounding the federal budget bill in its final form has the government in a semi-state of limbo with a high probability of the bill being passed by Congress sometime soon.

With these fluid factors dominating what is a headline-driven market at present, the second-quarter earnings season can’t get here fast enough for Wall Streeters. With all that has occurred in the first six months of the year, the quarterly reporting season will be like going to a great double-feature movie with Top Gun Maverick expectations. The movie lived up to the billing, and based on the pace of capital spending for AI, the tech-led rally, led by the doubling down of the hyperscalers in AI capex spending, sets the table for what will easily be the most intriguing forward guidance in recent memory.

Regarding the inflation alarm bells the mainstream media puts out per the upcoming implementation of the tariffs, in the Q1 2025 reporting period, FactSet searched for the term “inflation” in the conference call transcripts of all the S&P 500 companies that conducted earnings conference calls from March 15 through June 13.

Of these companies, 228 cited the term “inflation” during their earnings calls for the first quarter. This number is consistent with the average number of S&P 500 companies that have cited “inflation” on their earnings calls over the past four quarters (Q1 2024 through Q4 2024) of 231. This number is also below the five-year average of 254 and marks the fifth straight quarter in which less than 250 S&P 500 companies cited the term “inflation” on quarterly earnings calls. However, it should also be noted that the number of S&P 500 companies citing “inflation” on earnings calls for Q1 2025 is still well above the 10-year average of 189.

The three most recent inflation reports, CPI, PPI and PCE, were downright tame or below forecast. But the bears are stating “just wait!” It’s coming, a spike in inflation is not a matter of if, but when. What if the “when” doesn’t come? There is a salient argument for why the “when” won’t come due to slowing global growth.

It’s called weakening aggregate demand. If overall consumer and business demand for goods and services is softening due to other factors (e.g., higher interest rates, reduced consumer confidence, slowing global growth), this can exert downward pressure on prices that outweigh the upward pressure from tariffs. Less money chasing goods generally leads to lower prices.

Foreign exporters might choose to absorb some or all of the tariff costs to remain competitive in the market, rather than passing them entirely onto consumers. This would reduce their profit margins but keep consumer prices lower. While tariffs reduce competition from imports, strong domestic competition or the emergence of new domestic producers could help keep prices in check.

The biggest determinant that is getting more mentions among analysts, chief market strategists and economists about why inflation will remain at current levels and trend lower going forward is due to technological advancements and productivity gains, most of which are attributed to AI. Ongoing technological improvements and increased productivity can lead to lower production costs over the long run, offsetting some of the price increases from tariffs.

Investors have much to be excited about for the next six weeks heading into August as the earnings parade begins in earnest this week with Carnival Corp. (CCL), FedEx Corp. (FDX), Micron Technology Inc. (MU), General Mills Inc. (GIS), Paychex Inc. (PAYX) and Nike Inc. (NKE) — all of whom are prominent names in each’s respective sector. It will be most interesting to see what the CEOs say about their AI investments to enhance productivity and efficiency within their businesses.

This is the big payoff for Wall Street and investors looking to the monetization of AI as a major contributor to sales, profit margins and earnings. The latest saying within corporate circles is “if you are hiring people, you’re doing something wrong.” That’s a bit alarming on the surface even if it is a broad-brush statement, but there is disruptive change hitting the labor market that it is only going to be more pronounced with each passing month, and the impact on employment data caused by AI implementation will be felt across virtually all industries and sectors of the economy and government.

In his 1966 “Ripple of Hope” speech in Cape Town, South Africa, Robert F. Kennedy famously used the phrase “There is a Chinese curse which says, ‘May he live in interesting times,'” and added, “Like it or not, we live in interesting times. They are times of danger and uncertainty; but they are also more open to the creative energy of men than any other time in history.” Sounds fitting for how the first half of 2025 has transpired.

P.S. I will be holding a special, subscribers-only teleconference on Wednesday, June 25 at 2 P.M. EST and I will be discussing “Bullish Momentum Paves Way for 2nd Half Profits” It is free to attend but you must register here to be able to attend. Don’t miss out!