Don't expect tariffs to have a massive inflationary impact, says Hightower's Stephanie Link

Key Concepts:

• Tech earnings (Microsoft, Apple, Meta, Amazon)
• Gross margins
• Product cycles (Apple)
• Earnings season
• Revenue growth
• Onshoring/Reshoring
• Electrification theme
• Aviation industry
• Copper demand
• EU and Japan deals (energy, tech, defense)
• Tariff deadlines
• Federal Reserve policy
• Inflation

Tech Earnings and Apple's Controversy

Stephanie Link discusses the upcoming earnings reports of major tech companies, emphasizing their significant weight in the S&P 500 (19% for Microsoft, Apple, Meta, and Amazon combined). She is optimistic about Amazon and Meta, neutral on Microsoft (due to its high valuation at 35 times earnings), and most cautious about Apple. The key concern for Apple is its gross margins, particularly the potential impact of tariffs. While current quarter numbers may be acceptable, guidance on tariff effects will be crucial.

Link notes that while buying Apple on dips has historically been a successful strategy, this time might be different. She believes a "super cycle" for the next iPhone is unlikely due to the absence of a significant AI component. At a valuation of 29 times forward estimates, with mid-single-digit revenue growth and potential gross margin contraction, she sees better opportunities elsewhere.

Earnings Season Overview

32% of the S&P 500 have reported earnings, showing approximately 5% revenue growth and 8.5% earnings growth. Link considers this positive given the 2.5% GDP growth environment. She maintains her expectation of 10% earnings growth for the full year and for the current quarter.

Banking Sector Performance

Large-cap banks collectively beat estimates in the second quarter, a rare occurrence (only the second time in 66 quarters). Link suggests owning bank stocks, highlighting their relatively low valuations (12-14 times earnings, 1.2-1.5 times book value, excluding JP Morgan).

Onshoring and Reshoring Theme

Beyond banks, Link identifies onshoring and reshoring as a key theme. GE's book-to-bill ratio of 1.3 and raised guidance indicate strong visibility and margin improvement. She favors the electrification theme, mentioning names like Eaton, Rockwell, and Vertiv.

Aviation and Copper Demand

GE's engines division reported 30% growth, driven by Boeing's recovery. Link anticipates a solid earnings report from Boeing. Freeport-McMoRan increased its copper demand forecast for the second half of the year, which Link views positively despite the stock's negative reaction. She attributes such discrepancies to the "silly season" nature of earnings season, creating potential buying opportunities.

EU and Japan Deals

Link agrees that the deals with the EU and Japan, particularly in energy, technology, and defense, are positive for companies like Nvidia, Palantir, and Broadcom. She believes the tariff deadlines at the end of the week will be a "nonevent" due to these ongoing deals. While much of this positive news is already priced in (making February-April a more opportune buying period), she sees it as beneficial for visibility, economic growth, and earnings.

Federal Reserve Expectations

Link expects the Federal Reserve meeting to be a "nonevent." She recalls Powell's previous statement that the Fed would have already cut rates if not for tariff uncertainties. She anticipates a reiteration of this stance, emphasizing the Fed's watchful and waiting approach. Link believes the inflationary impact of tariffs will be limited due to companies' mitigation efforts through restructuring, cost-cutting, and pricing strategies.

Synthesis/Conclusion

Stephanie Link's analysis suggests a cautiously optimistic outlook. While tech earnings, particularly Apple's, warrant close attention, overall earnings season trends are positive. The banking sector and themes like onshoring, reshoring, and electrification offer investment opportunities. International deals are seen as beneficial, and the Federal Reserve is expected to maintain its current stance. The key takeaway is to focus on companies with strong fundamentals and growth potential, while remaining aware of potential risks like tariff impacts and valuation concerns.