Cautious Optimism: What Q2 Earnings Say About Corporate America’s Outlook

Slightly over 20% of S&P 500 companies have reported earnings for the second quarter (less if measured by market cap) and so far, it appears that results are good enough. The rate of results outpacing earnings expectations is near 90%, with average upside surprises around the historical average of approximately 7% on earnings per share (EPS), while about 2% upside on sales is coming in ahead of historical averages of roughly 1.2%. Investors are primarily focused on forward-looking guidance commentary; however, an earnings surprise on the quarter will only go so far if forward guidance underwhelms. Overall, the data thus far has been in-line to slightly better than recent history, and this has led to collective applause from the market — outside of outright misses or underwhelming guidance, one-day post-print stock reactions have been positive.

Looking beyond the numbers and digging into the earnings call transcripts provides additional color on what management teams have seen in recent months, and what may lie ahead. Focusing on what matters to LPL Research, we highlight management commentary in three thematic groups: 1) tariffs/trade policy; 2) artificial intelligence (AI) capital expenditures (capex); and 3) fiscal/tax policy. These thematic groups align with what Chief Equity Strategist Jeff Buchbinder is watching this earnings season, as outlined in his second quarter earnings preview.

Tariffs and Trade Policy: Navigating Uncertain Terrain

As one would expect, management teams are generally hesitant to speculate on where trade negotiations will ultimately land, which makes sense given talks are ongoing. The recently announced trade deal with Japan of 15% across-the-board tariff rates (including autos), lower than recently reported 25%, came as welcome news to U.S. and non-U.S. stocks alike, and potentially bodes well for negotiations with the European Union (EU). We note that this news was not known at the time of the earnings calls we analyzed. That said, overall commentary on trade and tariffs, thus far, has been better than anticipated, in our view, showing resilience and ingenuity from U.S. corporates when it comes to managing through uncertainty.

“During our Q1 call, we indicated a potential impact of tariffs of approximately $5,000 per unit that could hit in the latter part of Q4. At this time, we now expect any impact from tariffs in Q4 to be lower, which will help offset the cost of elevated incentives.”

“Today about 20% to 25% of our lumber comes from Canada, the rest of it we’re domestically sourcing.”

“Our procurement teams are the best in the business. They’ve done a wonderful job navigating another difficult procurement environment. I think we’ve also gotten a little bit of luck on our side with there being more inventory in the supply chain that has allowed prices to stay more -- stay stable longer. I don’t think anybody believes that’s going to last forever and we’re certainly anticipating a tariff load hitting our closings in next year. But we think for this year, it’s going to be minimal and mostly in the back half of Q4.”

PulteGroup (NYSE:PHM), Inc., Ryan R. Marshall, CEO

"It’s an interesting time in the market. And as we look at the effect of tariffs on Q2, they were certainly well present for us, and we think that the amount of tariff impact will and the current structure increase in Q3. So, we’ll have an increased weight of impact on price versus cost for us in Q3. And that’s obviously a North American centric comment. So, there’s some variability sitting in there because it depends on how the tariff structures continue, whether that’s 232 or court rulings on IEEPA, it could also be affected by the current August 1st statements around what new tariffs might be affected and what rates they’ll be at."

“PACCAR (NASDAQ:PCAR)’s truck, parts, and other gross margins were 13.9% in the second quarter. Given the uncertain tariff structure, it’s difficult to forecast third-quarter margins. Assuming the current tariff structure and market conditions, third-quarter margins could be around 13%. I’m proud to share that over 90% of PACCAR’s US-delivered trucks are produced in our American factories.”

“We do have a tariff surcharge listed onto our trucks for the US and Canada right now. And so, we are pricing that in, which allows us to price out into the future. …. And so, each of these discussions and business relationships has that discussion around if tariffs change, then there is a change potentially in what the pricing is.”

PACCAR, Preston Feight, CEO

“While Snap-on is relatively advantaged in the current tariff environment, generally manufacturing products in the markets where they are sold, our cost can be affected by trade policies. In the quarter, we mitigated the effect of incremental tariffs, managing material and other costs so that there was no meaningful impact on gross margins.”

Snap-On Inc (NYSE:SNA)., Aldo J. Pagliari, CFO

AI Capex Cycle: All Gas, No Brakes

Investors remain keenly focused on how much is being invested in AI infrastructure, how the technology is being monetized, and where the technology is driving efficiency gains. Alphabet (NASDAQ:GOOGL) Inc. was the first mega cap tech company to report earnings, last night after market close, and they increased their full-year capex guidance by $10 billion, to $85 billion. Alphabet also noted in their press release that AI is positively impacting every part of their business. While we wait for cloud/hyperscaler (Alphabet, Amazon (NASDAQ:AMZN), and Microsoft (NASDAQ:MSFT)) earnings calls later this week and next, we focus on potential beneficiaries of the AI capex cycle: manufacturers of datacenter electrical equipment, power generation equipment, and semiconductor capital equipment. These management teams highlight the revenue growth from AI spending reported in the second quarter and what could be achieved going forward.

"(I.T. and Data Comm) Sales in the second quarter grew by a very strong 133% in US Dollars and organic. And this is driven by continued acceleration in demand for products used in artificial intelligence applications. Together with continued robust growth in our base I.T and Data Comm business. I’m very proud of our team’s outstanding execution in the second quarter, as we were actually able to outperform even our customers’ very high expectations for deliveries of AI related products."

Amphenol (NYSE:APH), R. Adam Norwitt, President and CEO

"Demand for data centers also remain strong in Electrification. We’ve already received almost $500 million in orders in the first half ’25 versus $600 million in full year ’24. So, this growth market continues to accelerate."

"...we’re also gaining real confidence and conviction on our ability to continue to expand our markets in Electrification. We’re having very productive conversations with the hyperscalers on incremental solutions we can provide them, and I do expect our R&D to continue to ramp up in Electrification in 2026."

GE Verona, Scott Strazik, CEO

"As we look ahead to 2026, we continue to see strong demand related to AI for both Logic and Memory, and we see the positive impact of the growing number of EUV layers."

“Turning to the market, as we have said in recent quarters, artificial intelligence is the key driver of growth in Memory and Logic at this point. … Turning to our EUV business. Customers continue to add capacity on the leading edge to support AI demand in which EUV plays an increased role”

ASML Holding (AS:ASML) N.V., Christophe Fouquet, President and CEO

One Big Beautiful Bill Act: CFOs See Beauty in R&D Provisions

The latest budget reconciliation bill, known as the One Big Beautiful Bill Act (OBBBA), is President Trump’s first signature piece of legislation in his second term in office. Signed into law on July 4, the tax bill includes extending/making permanent provisions from the President’s first-term legislation, the Tax Cuts and Jobs Act (TCJA), as well as several new provisions. Adam Turnquist, Chief Technical Strategist, outlined key updates and how they may impact different cohorts of companies in his recent blog, "One Big Beautiful Bill Act — Six Takeaways". Of most interest to us are provisions increasing support for businesses, particularly full expensing of research and development (R&D) spending and increased interest expense deductions. Management teams at the companies we analyzed highlighted R&D spending, domestic manufacturing incentives, and defense spending funding.

“We are pleased that the One Big Beautiful Bill Act provides certainty for our previously announced $55 billion commitment to invest here in the United States. This includes provisions such as permanent expensing for domestic R&D spend, permanent bonus depreciation, and 100% expensing of qualified production property, including our newly planned facility in North Carolina.”

Johnson & Johnson (NYSE:JNJ), Joseph J. Wolk, CFO

“It’s hard to know what is going to happen ultimately with tariffs. But what we do know for sure is that the tax policies that just passed are already creating American jobs and driving innovation. These very policies that just passed are the ones that have enabled our commitment to invest $55 billion in the U.S. in the next four years. And our goal is to be able to manufacture in the U.S. all the medicines that are consumed in the U.S. at the completion of that plan, and we are on our way of being able to do that.”

Johnson & Johnson, Joaquin Duato, CEO

“On the other hand, the administration’s legislation is anticipated to provide approximately $400 million to $600 million in cash tax benefits, primarily related to R&D capitalization.”

“And I’ll just note as well, as part of the One Big Beautiful Bill, it helps incentivize investment in US manufacturing, because seeing where the demand is going to come for Golden Dome, we see our munition -- our missile programs being very key to that and we’re getting ourselves ready to invest in additional manufacturing capacity. And so the timing is very good with the Tax Act that came through.”

Lockheed Martin (NYSE:LMT), Evan Scott, CFO

“On the defense side, we see solid momentum globally toward modernization and localization. Domestically, we’re pleased the reconciliation package includes funding for key defense propulsion initiatives, with more than $1 billion for sixth-generation aircraft programs.”

GE Aerospace, H. Lawrence Culp Jr., Chairman & CEO

“…. they’re actually starting to engage us on that as that legislation is passed, and it does have benefits to their cash and their ability to deploy that cash or capital asset purchases like trucks is starting to be part of the conversation and as part of our optimism for the latter part of the year.”

PACCAR, Preston Feight, CEO

“…it will be very positive -- it’ll be a very positive for us as a company as well because that R&D expensing as well as the immediate R&D expense -- expensing on the fixed assets, we think will provide cash tax benefits in the $300 million to $400 million range. So it’s good news for us, good news for our customers.”

PACCAR, Brice Poplawski, CFO

Summary

Quarterly earnings season can be overwhelming, and from an equity investor’s perspective it can at times feel like as soon as one quarter is wrapping up you are already getting prepared for the next. However, we cherish the opportunity to hear directly from the leaders of the various public companies we follow as it provides important context to the underlying data we all analyze so closely. Our goal is to provide readers with insightful nuggets of commentary, without having to parse through all the earnings notes.

Our takeaways from earnings season (so far) as they relate to our key earnings season themes are:

• Trade policy and tariffs are being managed as good as could be hoped, and corporate leaders have provided guidance around the impact as best they can.

• The AI capex cycle appears to still be in early innings, or middle innings at the latest.

• Recent passage of tax and spending legislation provides several tailwinds to public company finances and may lead to increased investment in the United States.