Commencing the Quarter – Q1'26

Earnings season is quickly approaching!

Across sectors, companies are navigating a now highly uncertain geopolitical environment and uneven macro, where persistent inflation, evolving tariff dynamics, dislocated equity markets, and war are limiting visibility, elevating costs, and yielding a more cautious tone than what was heard last quarter. Across earnings calls in the last several weeks, executives highlighted tightening constraints in raw materials, worsening logistics bottlenecks, and rising input costs, particularly in chemicals and industrials, where disruptions to feedstocks and shipping routes are already evident. At the same time, many companies emphasized the potential for second-order effects, namely higher inflation, higher-for-longer interest rates, and softening demand, suggesting that even a short-lived conflict could have prolonged economic consequences as supply chains take time to normalize.

Companies describe a consumer environment characterized by persistent inflation, cautious spending, and heightened sensitivity to everyday costs. Consumer-facing companies note demand remains intact but increasingly fragile and value-oriented, with lower- and middle-income consumers, the “Bottom-of-the-K”, continuing to trade down. Meanwhile, housing and discretionary categories continue to face ongoing affordability constraints, as higher material, labor, and financing costs weigh on activity. Despite this, some pockets of resilience remain, particularly among higher-income consumers and in experiences, though even these segments are being more closely scrutinized for signs of softening, as the “Top-of-the-K” endures a dislocated, roller-coaster equity market yielding losses.

Importantly, companies are not broadly pulling back on investment. Capital allocation strategies remain largely intact, with continued emphasis on long-term priorities such as AI, automation, and supply chain resilience. Large-scale capex plans in semiconductors and infrastructure persist, while consumer and industrial companies are leaning into productivity and efficiency initiatives to offset cost pressures. At the same time, some companies, particularly in consumer discretionary, are balancing these investments with shareholder returns, including accelerated buybacks, signaling confidence in longer-term fundamentals despite near-term uncertainty.

On tariffs, companies are taking a pragmatic approach. Most expect tariff impacts to remain steady despite policy changes, relying on well-established mitigation levers such as supplier diversification, pricing adjustments, and product redesign. Not surprisingly, across the board, companies continue to accelerate the adoption of AI, with a growing focus on demonstrable ROI, including efficiency gains, cost savings, and improved customer experiences.

Key themes from our analysis:

• Iran Conflict — Companies Are Discussing the Immediate Disruptions to Rising Energy Prices and Constrained Materials Supplies While Also Monitoring Second-Order Effects
• Macro Backdrop — Rising Energy and Raw Materials Foreshadow Increased Inflationary Pressure and May Hamstring Fed in Easing Rates, a Key Driver for Consumer Discretionary and Housing Related Names; Consumer Companies Continue to Cut Costs While Consumer Pressure Compounds
• Capital Allocation — Capex Story Remains Intact Despite Iran War and Rising Yields; AI Investments and Upgrading Supply Chain Resiliency Remain Strong Secular Trends While Consumer Discretionary Companies Favor Buybacks
• Tariff Developments — Companies Largely Expect a Steady Impact from Tariffs Despite the IEEPA Ruling as Other Tariffs Likely to Replace IEPPA Currently in Effect; Expect Q&A Centered on Potential for Tariff Refunds
• The Bifurcated Consumer — Remains Strained at the Margins and Increasingly Value-driven as Oil Prices Eat into Discretionary Income; Low- and Middle-Income Households Continue to Trade Down
• AI Opportunity — Expect More Investor Scrutiny of ROI and Discussions of Specific Examples across Operations, Products, and Workflows