Each quarter, in the midst of earnings season, we write a market bulletin focused on U.S. corporate profitability. Over time, stock prices follow earnings, which makes tracking these trends particularly important. Political uncertainty is looming large in the current environment, but profits can act as a safety net when the market begins to wobble. Essentially, the stock market is caught in a tug of war between politics and fundamentals.

On the one hand, escalating trade tensions and the potential for additional tariffs suggest caution may be warranted; on the other, robust economic and profit growth support risk assets continuing to climb higher. So far the fundamental forces seem to be winning – as evidenced by the S&P 500’s positive year-to-date return – but the recent softening in confidence indicators, albeit from elevated levels, will be worth monitoring.

Against this turbulent policy backdrop, the 2Q18 earnings season is continuing the streak of healthy profit growth that began nearly two years ago. With approximately 62.6% of companies reporting, 84% have beaten earnings estimates and 60% have beaten sales estimates. Looking at a combination of reported earnings and analyst estimates, we forecast 2Q18 S&P 500 profits grew by 28% from a year prior.

As shown in the chart below, many of the themes that dominated earnings announcements in the first quarter have continued – a significant benefit to profits from tax reform, higher oil prices supporting energy sector earnings, and a weaker dollar benefitting those companies with healthy revenue generation outside the United States. In other words, the stars aligned for earnings in 2Q. We estimate that tax reform is responsible for about 7%-pts of the earnings growth seen in 2Q, while a weaker dollar and higher oil prices have contributed another 4%-pts. Furthermore, profit margins look to have hit an all-time high of 11.8%, as low rates, still-weak wage growth, and lower taxes all provide a boost to profits.

For more on the 2Q18 earnings season, please click here: 2Q18 earnings update: Tug of war

2Q18 drivers of earnings growth

Contribution to year over year % change

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Source: Compustat, Federal Reserve System, NYMEX, Standard & Poor's, FactSet, J.P. Morgan Asset Management.Data are as of 7/26/2018.