Despite ample reasons for pessimism this year, the global economy and markets have largely exceeded expectations. This has sharpened attention on corporate financial results and guidance, as investors look for insight on how firms are navigating a more challenging operating environment caused by unpredictable U.S. trade policy, how tariffs are feeding into inflationary pressures in the U.S., and the potential impact on monetary policy.
In this economic update, we are looking at the solid earnings growth in the U.S. and the caution being shared about the future and possibly delayed impact of tariffs. We are also examining the latest on U.S. inflation, looking ahead to the policy making direction of the U.S. Federal Reserve as they try to balance employment and stable prices, as well as unpacking the potential impact of tariffs in Canada.
We are sharing the latest episode of the 10-Minute Take, where RBC Economics' Claire Fan and Carrie Freestone discuss their ‘stagflation lite’ view of the U.S. economy. We are also sharing a more detailed dive into the latest key economic and trade developments in the most recent MacroMemo with RBC Global Asset Management Chief Economist Eric Lascelles.
Economic Update
A reassuring Q2 earnings season
With the U.S. earnings season now largely complete, results were generally better-than-expected, with the realized earnings growth rate handily surpassing consensus estimates. Notably, the number of earnings estimate upgrades relative to downgrades reached its highest level since late 2021, marking a reversal from earlier cuts prompted by uncertainty over the impact of supply chain disruptions, which to date have proven less severe than initially feared.
While analysts have attributed the solid earnings performance to effective tariff-mitigation strategies and a weaker U.S. dollar, they also cautioned that the full effects of tariffs have yet to be felt given the front-loading of goods earlier in the year has likely deferred the impact.
Moreover, the burden of tariffs is unevenly distributed across industries. Some trade-reliant sectors are already feeling the pinch. For instance, major U.S. automakers revealed hefty import duty charges in relation to automobile and metals tariffs, while select retailers have delivered mixed results and warned of potential price hikes once their front-loaded inventories are exhausted. On a more positive note, persistently strong results and constructive guidance from large-cap technology and adjacent companies, key beneficiaries of the AI-related investment cycle, have provided crucial support to the S&P 500’s earnings momentum.
On balance, the earnings outlook remains supportive of equity markets. Consensus estimates for the S&P 500 are pointing to profit growth of around 9% in 2025 and 12% in 2026. Globally, the MSCI All-Country World Index is expected generate earnings growth of 9% in 2025 and 11% in 2025. As we progress through the second half of 2025, markets will continue to hone in on corporate guidance for 2026. Most companies offering 2026 guidance are holding projections steady, but management teams continue to emphasize an uncertain environment and are still gauging how tariff impacts may feed through to financial results. As RBC Capital Markets Head of U.S. Equity Strategy Lori Calvasina noted, “we have a long way to go to understanding how the recent changes in trade policy will impact demand and 2026 outlooks.”
U.S. inflation readings flash mixed signals
Elsewhere, markets are closely watching the transmission of tariffs through the economy. The front-loading and inventory buildup at pre-tariff prices have temporarily shielded consumer prices and corporate profit margins. But as these stockpiles unwind, firms are likely to face an uncomfortable decision: absorb the tariffs at the expense of lower margins (which may increase pressure to cut costs elsewhere such as labour) or pass the tariffs onto consumers through price increases (which may dampen demand). Recent U.S. producer price data showed the strongest monthly increase in over a year, suggesting tariffs may be impacting prices further up the supply chain. However, the latest consumer price data was relatively benign. The divergence between consumer and wholesale prices underscores the difficulty in assessing the true trajectory of inflation, a factor that is complicating the outlook for U.S. monetary policy.
All eyes on Jackson Hole
Markets will be attentive to Federal Reserve Chair Jerome Powell’s speech at the annual central bank conference in Jackson Hole, Wyoming. This event has long been a key platform for Fed chairs to potentially provide guidance on the Fed’s thinking around monetary policy. This year, markets will be parsing Powell’s comments for hints about whether the Fed will maintain its “wait-and-see” approach or signal a possible policy shift. A weaker-than-expected jobs reports for July prompted markets to price in a 25-basis point cut at the Fed’s September meeting. But with inflation still above the central bank’s 2% target, policymakers face a tricky task of balancing their dual mandates of maximum employment and stable prices.
What about Canada?
Meanwhile, consumer price pressures in Canada have eased, largely due to the unwinding of the consumer carbon tax back in April. On trade, the USMCA free trade agreement continues to backstop duty free access to the U.S. market for most Canadian exports. The U.S. Census Bureau reported 92% of Canadian exports to the U.S. crossed the border duty free in June―up slightly from 91% in May and 89% in April. The Bank of Canada (BoC) has held its benchmark rate steady at 2.75% for three consecutive meetings since March and RBC Economics expect the BoC is unlikely to cut again in this cycle.
Summary
In the U.S., an uptick in producer prices and the prospect of consumer price increases have renewed concerns that trade-policy uncertainty could stoke inflation in the near term. Nevertheless, strong corporate fundamentals alongside upward earnings revisions have continued to provide a foundation for cautious optimism in markets as we continue to monitor developments on trade policy and corporate earnings.
The 10-Minute Take - ‘Stagflation Lite’: What this means for the U.S. Economy
Recent economic data from the U.S. has indicated the early signs of tariff impacts, emerging alongside unexpected labour market weakness – creating a ‘stagflation lite’ scenario.
In this most recent episode of the 10-Minute Take, RBC Economics' Claire Fan and Carrie Freestone are discussing this ‘stagflation’, how it differs from the more severe stagflation of the 1970’s, why downward revisions to employment figures could be concerning, and what this situation in the U.S. could mean for Canada’s export-dependent economy.
You can listen to the 10 minute episode by clicking here.
MacroMemo: Where we’ve landed and what’s next
In the latest episode of MacroMemo, RBC Global Asset Management Chief Economist Eric Lascelles unpacks some of the latest economic and trade developments including tariffs and trade deals, corporate sentiment from earnings calls, and the themes that will continue to influence the economic outlook for years to come.
Watch the full episode by clicking here.
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