- Fourth-quarter earnings results have been impressive so far, but it's early.
- The still-unclear impact of forthcoming tariffs may have affected results.
- Here's how UBS says investors can navigate an unusually confusing time in markets.
Companies have served up strong fourth-quarter earnings results so far, but investors probably should take them with a grain of salt.
Corporate profits are easily clearing the bar of mid-single-digit growth that analysts had set. Earnings rose about 9% year-over-year in the first week of the Q4 reporting period, according to Bank of America, and that pace seemed to hold steady into the second week.
Another promising sign is that more firms are exceeding estimates. Over 80% of stocks have topped sales and earnings estimates, BofA recently found, versus 73% at this point in Q4 2023.
US stocks have reached all-time highs on the back of this news, as well as enthusiasm about what many view as pro-business policies from newly minted President Trump.
Investors might want to keep their enthusiasm in check for several reasons, the most obvious being that it's still very early in the Q4 earnings season. Mega-cap stocks like Amazon, Apple, Meta, and Microsoft report next week, and they may need to deliver to keep the market afloat.
But even if earnings stay strong, these might not necessarily be a sign of what's to come.
Tariffs will 'muddy the waters' of Q4 results
These fourth-quarter results could be the toughest to interpret in recent memory, strategists at UBS Global Wealth Management wrote in a mid-January note.
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Earnings might be artificially inflated if companies or consumers are making larger-than-usual purchases ahead of the tariffs Trump is expected to implement in the coming weeks, UBS said. But the inverse could be true, as all of the uncertainty could have delayed major purchases.
"In certain industries, it's possible that investors will be skeptical of strong results if they reflect pre-buying ahead of potential tariffs," UBS GWM strategists wrote. "In other industries, companies may be delaying plans until the tariff picture becomes clearer."
Either way, last quarter's earnings could help optimists and pessimists bolster their arguments. Bulls could highlight strong results in the face of the uncertainty this new administration brings, and bears could say that buying was disproportionately strong and is destined to bull back.
There's plenty of debate about whether the Trump tariffs would be a net positive or negative, though it's hard to refute that they will "muddy the waters" for earnings, as UBS strategists put it.
David Lefkowitz, UBS GWM's head of US equities and the lead author of the note, recently told Business Insider that he's listening to companies' post-earnings commentary for information about contingency plans for tariffs, specifically for consumer discretionary and industrial firms.
"I don't think there's going to be a lot of answers," Lefkowitz said in an interview.
He added: "The only thing we have to go on is commentary from management teams, and that also is somewhat speculative. I mean, they can ask their customers, 'Well, why are you doing what you're doing?' But beyond that, they may not be getting a clear message themselves. So I just think it's going to be a little bit more noisy."
To that point, consumer goods giant Procter & Gamble didn't mention tariffs in its January 22 earnings call. When asked about potential tariffs, CEO Jon Moeller told CNBC that "we're fans of free trade, but we'll manage as best we can with those kinds of initiatives at our back."
Trump has said which countries he plans to put tariffs on, but it's unclear if those nations will respond by making concessions or implementing their own import taxes. However, Lefkowitz said if there are counter-tariffs, consumer-focused companies like P&G could be spared.
"We're also somewhat skeptical that Trump would go forward with tariffs on consumer products," Lefkowitz said. "That's where the consumer would feel the biggest direct impact, and he was partly elected on the basis of the high cost of living."
How to invest in light of tariffs
Tariffs could become the top story in markets this year, though Lefkowitz said they aren't yet.
"This is all very much on the margin," Lefkowitz said when asked how pulled-forward spending has impacted Q4 earnings, adding that it isn't "dramatic in terms of moving the needle."
In turn, Lefkowitz and his colleagues say investors can stick with large caps over smaller stocks due to their superior earnings and exposure to artificial intelligence. Besides, bigger companies are less impacted by higher-for-longer interest rates, as UBS strategists previously pointed out.
Both growth and value stocks can work in this backdrop, Lefkowitz believes, though his team is most excited about information technology stocks and communication services companies. The consumer discretionary, financials, and utilities sectors also have positive ratings. Tariffs could hurt certain consumer-focused firms, Lefkowitz said, but he's not losing sleep over them.
"We don't think tariffs are going to be a big deal for those companies, for the most part," Lefkowitz said.
