Weekly Update 08/08/2025: Earnings Season Continues
- CACI strongly closes fiscal year
- Disney earnings and deals draw spotlight
- Dupont outperforms peers
- Tariff enigmas continue
Economic Stats
There were two main releases of note this week. The first was from the Institute of Supply Management which reported its services gauge declined to 50.1 in July from 50.8 previously. The consensus estimate was for 51.5 with anything under 50.0 signifying a contraction. Price increases became more widespread in July, with the prices-paid index rising to 69.9, the highest level since 2022. Respondents attributed rising costs partly to tariffs, which we will touch upon in the next section. The employment part of the index fell to 46.4 from 47.2, marking the second straight month in contraction. Job gains were mostly limited to health care and social assistance, mirroring the findings of last week’s lower-than-expected monthly nonfarm payrolls report from the Labor Department.
The other focus of traders this week was the weekly initial unemployment report. Claims rose by 7,000 to 226,000 in the week ending August 2 according to the Labor Department. That was above the consensus of 222,000 taken in a survey of economists by Bloomberg. There were 234,000 initial claims in the comparable week a year earlier. Continuing unemployment insurance jumped by 38,000 to 1.97 million in the week ending July 26, suggesting that it is getting increasingly difficult to find jobs once let go. The continuing claims figure is at its highest since November 2021. These figures suggest that businesses are somewhat stuck in limbo, not wanting to hire given the uncertain economic outlook but not willing to sharply decrease payroll figures also given the uncertain economic outlook.
Eventually something has to give. Companies cannot stand still and watch talent be hired elsewhere putting them at a competitive disadvantage. But they can also not maintain high staffing levels should inflationary pressures lead to retrenchment by consumers knowing that government fiscal spending is likely off the table. The futures market is showing that there is a 91% chance of a rate cut at the next Federal Open Market Committee meeting scheduled for September 17. Given that is still over a month away, there will be more economic and inflationary data points including the consumer price index, producer price index, another monthly payroll and employment report, personal consumption expenditure index, housing reports and several weekly initial claims reports. The market is very sensitive to headlines which could lead to choppy trading especially since the third quarter of the year has historically been the time when companies provide guidance as to whether they will meet, exceed or fail to reach calendar year-end goals. Buckle up!
Tariff Talk
As we rapidly approach the end of summer, the tariff picture is somewhat clearer and certainly complex. Some of the country’s biggest trading partners—Japan, South Korea and the European Union—have agreed to pacts. Other countries--such as Canada, Mexico and China—continue with talks in hopes of coming to an agreement of understanding that will not severely damage commerce between them and the U.S. As a subset of country-level talks, there are levies on particular industries. For example, the president said on Wednesday that tariffs on imported semiconductors would be set near 100%. However, companies that invest in U.S. manufacturing would be exempt. That was the case with SGK Core holding Apple Inc., which pledged an additional $100 billion of investments in the U.S. on top of the $500 billion committed in February. CEO Tim Cook said that all the glass that Apple uses for iPhones and Apple Watches will soon be made in Kentucky by Corning as part of a $2.5 billion investment. After receiving a glass plaque with a gold base specifically designed for him, Trump described Cook as “one of the great and most esteemed business leaders, geniuses and innovators anywhere in the world.” The companies’ announcements to invest in America date back to the first Trump administration which shows a long-term track record. Regardless, the investment in U.S. manufacturing still pales in the monies so far spent on supply chains in China, India and elsewhere in Southeast Asia. “The market seems to believe that we’re in a pay-to-play world where companies can buy their way into tariff exemptions by making commitments to invest in the U.S., even if those investments fall far short of actually re-shoring manufacturing,” said Craig Moffett, an analyst at Moffett Nathanson.
For those not offering grandiose offers, the road is particularly tougher. The president announced an additional 25% levy on India for buying Russian oil, bringing the total charge to 50%. Pharmaceutical companies are still awaiting their tariff level to be set. Switzerland got hit with a 39% rate this week after Trump commented the country makes “a fortune with pharmaceuticals.” The rate, which is higher than all but three nations, was a shock to the famously neutral country known for its exports of watches, chocolates and precision machine tools. Even within deals already supposedly done, the details are not specifically worked out. For instance, EU companies will not pay the 100% semiconductor charge given the previously negotiated blanket 15% rate, and the block is working on carve outs for regional wines and spirits.
The whirlwind of activity and high likelihood of confusion makes one thing clear to us: investing in individual companies makes a lot of sense. Carve outs, exemptions and mitigating actions mean that some managements will be able to navigate today’s trade tempest to work in their favor versus others. Within a particular industry, there will be winners and losers which ultimately will show up in a firm’s cash flows. It is too difficult to make “blanket calls” even on small subsectors. Remember the Magnificent 7? Maybe it’s down to four now with Tesla and Apple underperforming the market this year and Amazon barely positive. Today’s environment merely emphasizes a famous Warren Buffett saying: “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” The short term is influenced by sentiment, speculation and what is happening on social media—in other words, a popularity contest. Our emphasis is on cash flow, sustainable competitive advantages and asset quality which are far superior characteristics and have been proven to correlate with outperformance over time. The phrase “it depends” really does matter when investing in the stock and bonds of a particular company in addition to the better risk-control and tax advantages.
Company Events
SGK writes additional weekly commentary for clients of the firm detailing recent events and earnings of core equity holdings.
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