What's the bottom line? 📝
Plus a charted review of the macro crosscurrents 🔀
📈The stock market rallied to all-time highs, with the S&P 500 setting an intraday high of 6,481.34 on Friday and a closing high of 6,468.54 on Thursday. For the week, the index gained 0.9%. It’s now up 9.7% year-to-date. For more on the market, read: 15 charts to consider with the stock market at record highs 📊📈
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The “bottom line” is colloquially used as a metaphor to refer to “the essential or salient point“ of a discussion.
The term originally came from accounting. On an income statement, the top line is revenue. As you move down the income statement, you see costs of goods, expenses, interest, taxes, and other items, all of which you subtract from revenue. What you’re left with after all those adjustments is earnings, which fall to the bottom line.
With the stock market today, I find that both the figurative and literal usages of the “bottom line” help me organize discussions about why prices are at record highs.
The figurative bottom line 📝
Investors have a lot to be concerned about: slowing economic growth, hotter inflation, trade policy uncertainty, tight monetary policy, heightened geopolitical tensions, and more.
All else equal, any of these risks presents headwinds to sales and/or costs.
However, all else is never equal.
Over and over again, we’ve read about how various risks would subtract from earnings. (Read more here.)
But what many often underestimate is Corporate America’s ability to evolve and adapt to challenges in its ruthless pursuit of earnings growth.
In these discussions about emerging risks, the risks themselves are not the bottom line.
The bottom line is whether companies will continue to deliver on earnings targets despite the challenges.
The literal bottom line 🧮
So, let’s talk about earnings, the original bottom line.
Q2 earnings season is mostly wrapped up. And the message from Corporate America has been clear: Uncertainty is high given all the risks, but the outlook for earnings growth is promising.
Wall Street analysts agree. And their 12-month, 24-month, and 36-month outlooks for earnings confirm this optimism.
For investors, it’s appropriate that the figurative bottom line — the effect of a risk on earnings — and the literal bottom line — earnings — both speak to TKer Stock Market Truth No. 5: Earnings drive stock prices.
Indeed, this bullish outlook for earnings continues to be the simplest explanation for why the stock market is holding up.
Keep an eye on tariffs 👀
Analysts’ earnings outlook is largely driven by expectations for high and even rising profit margins.
This is notable as we have yet to understand the full effects of new tariffs, which most experts agree will prove costly.
The hot July Producer Price Index report suggests that tariffs are causing inflation to heat up. (More on that below in TKer’s weekly review of the macro crosscurrents.)
According to Goldman Sachs research published last Sunday, U.S. businesses are currently eating most of the incremental costs from higher tariffs, which are a headwind for profit margins.
The analysts expect consumers to eventually bear most of the costs through higher prices. This isn’t great for future demand.
Will the bullish outlook for margins fall apart and bring down earnings estimates? We’ll see.
It’s worth noting that many market watchers have been expecting hot inflation and cooling demand to pressure margins since 2021. And yet, high margins persisted through to 2022, 2023, and 2024. And they’re expected to improve in 2025.
Maybe Corporate America will surprise skeptics yet again.
Zooming out 🔭
You should be mindful of developments that could harm the earnings prospects of the companies you invest in.
However, explorations of these issues should ultimately be grounded in what they mean for earnings, as earnings are the most important driver of stock prices. That’s the bottom line.
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Related from TKer:
Outstanding issues as Trump threatens the world with tariffs 😬
It remains 'dangerous' to underestimate Corporate America ⚠️
The wrong question — and the right one — to ask about headwinds 💬
Review of the macro crosscurrents 🔀
There were several notable data points and macroeconomic developments since our last review:
👎 Consumer price inflation ticks higher. The Consumer Price Index (CPI) in July was up 2.7% from a year ago. Adjusted for food and energy prices, core CPI was up 3.1%, up from the prior month’s 2.9% rate.
On a month-over-month basis, CPI was up 0.2% and core CPI increased 0.3%. If you annualize the three-month trend in the monthly figures — a reflection of the short-term trend in prices — core CPI climbed 2.8%.
For more on inflation and how it’s affected by tariffs, read: Companies plan to 'pass on costs' to customers 🤑 and 5 outstanding issues as President Trump threatens the world with tariffs 😬
👎 Wholesaler price inflation jumps. The Producer Price Index (PPI) in July was up 3.3% from a year ago. Adjusted for food and energy prices, core PPI was up 3.7%, up from the prior month’s 2.6% rate.
On a month-over-month basis, both PPI and core PPI were up 0.9%.
From Bloomberg’s Michael McDonough: “Tariffs raise import costs, and wholesalers/retailers often hike markups to protect profits — pushing PPI ‘services’ higher. Less foreign competition can also lift U.S.-made goods prices, so both goods and services PPI can climb even without stronger demand.“
For more on inflation and how it’s affected by tariffs, read: Companies plan to 'pass on costs' to customers 🤑 and 5 outstanding issues as President Trump threatens the world with tariffs 😬
⛽️ Gas prices barely budge. From AAA: “No news is good news for drivers as gas prices stayed on track this past week, with the national average returning to $3.16 after a few dips. The summer of lower pump prices continues, as the busy driving season nears its end. As we enter peak hurricane season, storms affecting gas production and distribution are something to keep an eye on. But right now, with crude oil prices remaining steady, there’s no indication gas prices will make any drastic moves.”
For more on energy prices, read: Higher oil prices meant something different in the past 🛢️
💼 New unemployment claims tick lower — but total ongoing claims are elevated. Initial claims for unemployment benefits declined to 224,000 during the week ending Aug. 9, down from 227,000 the week prior. This metric remains at levels historically associated with economic growth.
Insured unemployment, which captures those who continue to claim unemployment benefits, declined to 1.953 million during the week ending Aug. 2. This metric is near its highest level since November 2021.
Steady initial claims confirm that layoff activity remains low. Rising continued claims confirm hiring activity is weakening. This dynamic warrants close attention, as it reflects a deteriorating labor market.
For more context, read: The hiring situation 🧩 and The labor market is cooling 💼
🛍️ Shopping ticks higher. Retail sales increased 0.5% in July to a record $726.3 billion.
Most categories saw growth.
💳 Card spending data is holding up. From JPM: “As of 07 Aug 2025, our Chase Consumer Card spending data (unadjusted) was 5.2% above the same day last year.”
From BofA: “Total card spending per HH was up 3.5% y/y in the week ending Aug 9, according to BAC aggregated credit & debit card data. Entertainment saw the biggest y/y spending gain while dept. stores saw the biggest drop vs last week, across our categories. This continued pickup in total y/y spending growth is consistent with our view that the economy might be re-accelerating.”
For more on sales being pulled forward ahead of tariffs, read: A BIG economic question right now 🤔
👎 Consumer sentiment deteriorates. From the University of Michigan’s August Surveys of Consumers: “Consumer sentiment fell back about 5% in August, declining for the first time in four months. This deterioration largely stems from rising worries about inflation. Buying conditions for durables plunged 14%, its lowest reading in a year, on the basis of high prices. Current personal finances declined modestly amid growing concerns about purchasing power.”
“Year-ahead inflation expectations rose from 4.5% last month to 4.9% this month. This increase was seen across multiple demographic groups and all three political affiliations. Long-run inflation expectations also lifted from 3.4% in July to 3.9% in August. This month ended two consecutive months of receding inflation for short-run expectations and three straight months for long-run expectations.“
Relatively weak consumer sentiment readings appear to contradict resilient consumer spending data. For more on this contradiction, read: What consumers do > what consumers say 🙊 and We're taking that vacation whether we like it or not 🛫
🏠 Mortgage rates tick lower. According to Freddie Mac, the average 30-year fixed-rate mortgage declined to 6.58% from 6.63% last week. From Freddie Mac: “Mortgage rates fell to their lowest level since October. Purchase application activity is improving as borrowers take advantage of the decline in mortgage rates.”
There are 147.9 million housing units in the U.S., of which 86.1 million are owner-occupied and about 39% are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to the small weekly movements in home prices or mortgage rates.
For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖
🛠️ Industrial activity cools. Industrial production activity in July decreased 0.1% from the prior month's levels. Manufacturing output was unchanged.
For more on economic activity cooling, read: 9 once-hot economic charts that cooled 📉
👍 Small business optimism ticks higher. The NFIB’s July Small Business Optimism Index rose to 100.3 in July from 98.6 in June. From the NFIB: “While uncertainty is still high, the next six months will hopefully offer business owners more clarity, especially as owners see the results of Congress making the 20% Small Business Deduction permanent and the final shape of trade policy. Meanwhile, labor quality has become the top issue on Main Street again.“
For more on the state of sentiment, read: The confusing state of the economy 📊 and Beware how your politics distort how you perceive economic realities 😵💫
😬 This is the stuff pros are worried about. From BofA’s August Global Fund Manager Survey: “Trade war triggering a global recession remained the #1 'tail risk' ... Sentiment on what would be the biggest 'tail risk' was more broadly spread in August."
For more on risks, read: When uncertainty becomes unambiguously high 🎢, Three observations about uncertainty in the markets 😟, and Two times when uncertainty seemed low and confidence was high 🌈
🏢 Offices remain relatively empty. From Kastle Systems: “Peak day office occupancy was 63.1% on Tuesday last week, down four tenths of a point from the previous week. Most tracked cities experienced decreases throughout the week, as workers take more time away from the office as the summer vacation season winds down. The average low was on Friday at 34%, down two tenths of a point from the previous week.”
For more on office occupancy, read: This stat about offices reminds us things are far from normal 🏢
📈 Near-term GDP growth estimates are tracking positively. The Atlanta Fed’s GDPNow model sees real GDP growth rising at a 2.5% rate in Q3.
For more on GDP and the economy, read: 9 once-hot economic charts that cooled 📉 and You call this a recession? 🤨
Putting it all together 📋
🚨 The Trump administration’s pursuit of tariffs threatens to disrupt global trade, with significant implications for the U.S. economy, corporate earnings, and the stock market. Until we get more clarity, here’s where things stand:
Earnings look bullish: The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.
Demand is positive: Demand for goods and services remains positive, supported by healthy consumer and business balance sheets. Job creation, although cooling, also remains positive, and the Federal Reserve — having resolved the inflation crisis — shifted its focus toward supporting the labor market.
But growth is cooling: While the economy remains healthy, growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like excess job openings and core capex orders have faded. It has become harder to argue that growth is destiny.
Actions speak louder than words: We are in an odd period, given that the hard economic data decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continues to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.
Stocks are not the economy: There’s a case to be made that the U.S. stock market could outperform the U.S. economy in the near term, thanks largely to positive operating leverage. Since the pandemic, companies have aggressively adjusted their cost structures. This came with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.
Mind the ever-present risks: Of course, we should not get complacent. There will always be risks to worry about, such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, and cyber attacks. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.
Investing is never a smooth ride: There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect as they build wealth in the markets. Always keep your stock market seat belts fastened.
Think long-term: For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t be able to overcome over time. The long game remains undefeated, and it’s a streak that long-term investors can expect to continue.
For more on how the macro story is evolving, check out the previous review of the macro crosscurrents. »
Key insights about the stock market 📈
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.
10 truths about the stock market 📈
The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
The makeup of the S&P 500 is constantly changing 🔀
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.
The key driver of stock prices: Earnings💰
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings has a very tight statistical relationship.
Stomach-churning stock market sell-offs are normal🎢
Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
How the stock market performed around recessions 📉📈
Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
In the stock market, time pays ⏳
Since 1928, the S&P 500 generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
What a strong dollar means for stocks 👑
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
Economy ≠ Stock Market 🤷♂️
The stock market sorta reflects the economy. But also, not really. The S&P 500 is more about the manufacture and sale of goods. U.S. GDP is more about providing services.
Stanley Druckenmiller's No. 1 piece of advice for novice investors 🧐
…you don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.
Peter Lynch made a remarkably prescient market observation in 1994 🎯
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.
Warren Buffett's 'fourth law of motion' 📉
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
Most pros can’t beat the market 🥊
According to S&P Dow Jones Indices (SPDJI), 65% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2024. As you stretch the time horizon, the numbers get even more dismal. Over a three-year period, 85% underperformed. Over a 10-year period, 90% underperformed. And over a 20-year period, 92% underperformed. This 2023 performance follows 14 consecutive years in which the majority of fund managers in this category have lagged the index.
Proof that 'past performance is no guarantee of future results' 📊
Even if you are a fund manager who generated industry-leading returns in one year, history says it’s an almost insurmountable task to stay on top consistently in subsequent years. According to S&P Dow Jones Indices, just 4.21% of all U.S. equity funds in the top half of performance during the first year were able to remain in the top during the four subsequent years. Only 2.42% of U.S. large-cap funds remained in the top half
SPDJI’s report also considered fund performance relative to their benchmarks over the past three years. Of 738 U.S. large-cap equity funds tracked by SPDJI, 50.68% beat the S&P 500 in 2022. Just 5.08% beat the S&P in the two years ending 2023. And only 2.14% beat the index in the three years ending in 2024.
The odds are stacked against stock pickers 🎲
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. Most professional stock pickers aren’t able to do this consistently. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 24% of the stocks in the S&P 500 outperformed the average stock’s return from 2000 to 2022. Over this period, the average return on an S&P 500 stock was 390%, while the median stock rose by just 93%.
