Options Indicate Larger Earnings Season Fluctuations Due to Tariff Issues

Tariff Concerns Loom Over Second Profit Season

The impact of impending tariffs is likely to create volatility in the upcoming profit season, leading to increased caution among investors.

Recent discussions surrounding a deadline on August 1 have become contentious. US President Donald Trump has issued warnings of potential tariff hikes, affecting various trading partners—Brazil could see 50% increases, while the European Union faces a 30% rise. Given the ongoing turbulence over tariffs, this new uncertainty might hinder some companies’ ability to provide reliable future guidance.

Despite this disruption from tariffs, S&P 500 companies appear set for a revenue increase in the recent quarter, although perhaps not as dramatically as in April, when the market experienced significant upheaval.

The first quarter of this year saw many companies mention tariffs, but not all quantified their actual impacts or adjusted their forecasts accordingly. Investors, understandably, are seeking clearer insights now. A Goldman Sachs strategist noted that around 73% of S&P 500 companies plan to report results before the new baseline for commerce with the US is established, which could muddy the data a bit.

“The options market reflects a pretty volatile set of stock reactions expected from second-quarter earnings reports, especially for consumer and healthcare sectors,” said Kieran Diamond, equity derivatives strategist at UBS. This trend echoes what we’ve seen in recent years, with larger revenue day fluctuations becoming more common in both the US and Europe.

Healthcare, in particular, could see notable movements, with risks heightened due to tariffs and new spending cuts recently passed in Congress. Analysts have adjusted their expectations for European performance downward, while the outlook in the US has also stabilized somewhat. According to a BNP Paribas strategist, positioning in Europe is cautious, especially following Germany’s fiscal announcements, potentially leading to an upside risk for growth forecasts.

In the US, Deutsche Bank strategists observed that the positioning is slightly under neutral, which might support another rally. They noted a consistent stock pattern where, historically, there’s been a median of around 2% movement in about three-quarters of instances during earnings seasons.

Banks and financial institutions are set to report earnings in the US this week, with many larger entities showing more implicit movement compared to the average revenue fluctuations recorded over the past two years. Recently, the broader market has been experiencing mild pressure, and the volatility index has declined over recent weeks, though traders remain focused on significant price changes during earnings announcements. At one point last week, the CBOE S&P 500 volatility index reached its highest level since February.

Goldman Sachs anticipates that revenue day movements could escalate this quarter, as themes such as tariffs, AI, and government policies are likely to create distinct winners and losers rather than a uniform rise or fall. They’re predicting that profit day movements could increase from 2.5 times to 3.5 times the size of typical non-earning day movements this quarter.