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. We discuss in more detail below.

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 2026. As we progress through the second half of 2025, markets will continue to home 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.

Takeaway

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. For portfolios, “invested, but watchful” remains a sensible stance to us as we continue to monitor developments on trade policy and corporate earnings.