What is the bottom line for the stock market?

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.

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.

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.

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.

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.

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%.

👎 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.”

⛽️ 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.”

💼 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.

🛍️ 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.”

👎 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.

🏠 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.”

😬 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.”

🏢 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.”

📈 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.

🚨 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.

A version of this post first appeared on TKer.co