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Analysts say fear of trade wars and tariffs are a big factor behind the near 8 percent sell-off in stocks this month, yet companies so far aren't broadly seeing much of an earnings impact from President Donald Trump's trade strategies.
Along with higher interest rates, slowing global growth, and fears that tariffs and rising costs will hit earnings are among the most discussed catalysts behind the selling. The , from Oct. 1, has lost 8.2 percent, while the Dow is down about 6.5 percent.
Sectors that could be most impacted by trade skirmishes have been hit the hardest this month. Materials are off the most, down 12 percent, followed by consumer discretionary, off 11 percent, and industrials, also off 11 percent.
Despite the hand-wringing, even Wall Street analysts have not penciled much impact from tariffs into their corporate earnings forecasts, because companies for now are being just a little too vague. That could be because the duration of the tariffs is unclear, and also unknown is whether further tariffs will be slapped on Chinese goods, as threatened by the Trump administration, or exactly how China will respond.
"So far, it's similar to last quarter," said Jill Carey Hall, Bank of America Merrill Lynch equity strategist. Companies are saying "it's too early to tell, or there's some impact from tariffs but they're able to shift supplies or they can price it through or it's having limited impact. Then there are some companies indicating there's some impact."
Yet, just the mention of tariffs and higher costs sends a chill through the stock market. Caterpillar spooked the market even though it beat on earnings and revenues. Its comments included that tariffs are contributing to higher costs.
Hall notes that companies that have been beating on earnings are being unduly punished after their reports, something seen at the peak of market cycles.
"Even beyond tariffs, the stock reactions have been atypical," said Hall. On average, companies that beat have underperformed the market by 0.3 percent, while they usually outperform, according to Bank of America.
"This is something we haven't seen since 2000. We saw it right around the peak of the tech bubble. It's a bear market signpost," Hall said.
The U.S. has put tariffs of 25 percent on steel and 10 percent on aluminum products, starting June 1. Since then, it added another 25 percent tariff on $50 billion in Chinese goods as of July 6, and a 10 percent tariff on another $200 billion of Chinese goods on Sept. 24. That 10 percent tariff could rise to 25 percent if there is not progress in talks by year-end, and Trump has threatened to tariff all Chinese goods.
Trump and Chinese President Xi Jinping are scheduled to meet on the sidelines of a meeting of world leaders at the end of November, but for now it appears no progress is being made.
CNBC studied the comments of S&P 500 companies reporting earnings this quarter. Of the 110 S&P companies that reported third-quarter earnings through Tuesday's close, 41 of them — or 37 percent — either explicitly discussed or answered questions about tariffs.
UBS analysts said the trade concerns are mostly limited to certain industrials and semiconductor companies. For instance, chip makers Texas Instruments and AMD both issued disappointing fourth quarter outlooks. Texas Instruments said demand is weaker and it is not stocking up on inventory ahead of tariff implementation.
But the UBS analysts said capital expenditure spending growth also does not appear nearly as strong as the prior quarter. In terms of spending, capital expenditures for companies that have reported so far are up 11.6 percent year over year, a deceleration from the second quarter's 17.9 percent, but still 5 percent higher than the same quarter last year.
Companies are taking all sorts of measures to avoid hits to margins. Costco, for instance, said it was working with suppliers to reduce costs and in some cases is reducing order commitments on impacted items.
"Alternative country sourcing, sure, but again, it's where possible and feasible, it's a limited ability, and it takes time. We are, taking advantage of lower pricing on some U.S. items because of the reverse, if you will, such as pork, nuts and soybeans," said Richard Galanti, Costco's chief financial officer.
Analysts at UBS say they are not factoring in much impact at all from tariffs. For next year, they expect earnings to grow by 8.6 percent, and just 6.6 percent if current tariffs and those threatened are implemented.
UBS chief U.S. equity strategist Keith Parker said the tariffs aren't really showing up in Wall Street's 2019 forecasts yet, but they have dented fourth-quarter growth by about a percentage point. Typically, in the month of October, analysts in aggregate chop an average 1.4 percentage points off the next year's earnings growth forecasts, he said. But this year, there is no change and the number is basically flat. The consensus for 2019 earnings growth is 10 percent, on average very low, he said.
"You have an estimate that's a little bit lower than average in terms of growth, but in terms of how uncertain you are about that, when you hear tariffs and costs and input pressures, that raises the uncertainty or dispersion around that estimate and in some cases you're seeing them guide down in fourth-quarter earnings, but in aggregate on next year's earnings, it's not having an impact," Parker said.
"It may also be 'wait and see' because most of the company comments on tariffs have been very subjective in general, with less quantifiable specifics," he said.
He said the market is also worried about higher interest rates but that is not a major cost factor for corporate earnings, since S&P companies have termed out much of their debt at low rates.
Parker said the sell-off could subside after the midterm election.
"As long as buybacks and dividends provide liquidity at the end of October and into November, midterms usually coincided with, on average, very high equity returns, around 8 percent into year-end from mid-October," he said.