Corporate Earnings Insights During Trade Policy Changes

Sean Gross, CFP®, AIF®

Co-Founder & CEO

July 30, 2025

Corporate earnings reports typically offer valuable insights into business performance, but this earnings season holds particular significance given ongoing trade policy developments. Despite reaching record highs in major stock indices amid stabilizing trade relations, questions remain about how tariffs may impact both consumers and businesses. Encouragingly, new trade agreements continue to emerge while companies report results that surpass analyst projections.

Recent data indicates that consumer spending patterns remain robust and corporate profit growth keeps outpacing forecasts. The Yale Budget Lab reports that consumers currently face an average effective tariff rate of 20.2% as of July 23, marking the highest level recorded since 1911.[1]

The absence of this impact in consumer spending patterns indicates that many companies are absorbing tariff costs rather than immediately transferring them to customers. This approach appears feasible due to strong earnings performance and robust profit margins across many sectors.

Current results show that among the more than one-third of S&P 500 companies that have disclosed second-quarter earnings, 80% delivered positive earnings-per-share surprises, with the blended earnings growth rate of 6.4% surpassing the anticipated 4.9%, per FactSet data.[2]

Although this growth rate trails recent quarters, it indicates that an "earnings recession" – characterized by steep profit declines like those seen in 2020 or 2022 – appears less probable than initially anticipated.

Understanding tariff mechanics helps explain their potential appearance in financial results. While governments collect tariffs as revenue, the actual burden falls either on U.S. exporters or domestic consumers and businesses through elevated prices. The distribution between these groups depends largely on their respective "pricing power."

Consider rare earth metals essential for electronic devices – the U.S. imports nearly all of these materials. Given limited alternative sources, tariffs would likely be transferred directly to consumers. This explains why the administration has pursued agreements to expand rare earth metal imports from China and why domestic production has gained increased attention.

Conversely, the automotive sector operates in a highly competitive environment with numerous domestic manufacturers and countries seeking U.S. market access. When tariffs target vehicles from specific countries, those manufacturers might absorb portions of the costs to maintain competitiveness against other nations' products and domestic alternatives.

Short-term tariff effects therefore depend on industry competitiveness and available alternatives for consumers and businesses. Over longer periods, supply chains can adjust to new circumstances and currency values may shift accordingly.

Consequently, tariff impacts on earnings and corporate responses differ significantly across industries. General Motors reported $1.1 billion in tariff-related profit losses during the second quarter, with margins declining from 9% to 6.1%.[3] Meanwhile, Cleveland-Cliffs, a U.S. flat-rolled steel producer, announced second-quarter results exceeding expectations, benefiting from tariffs that reduced steel imports.[4]

The chart above demonstrates how earnings expectations vary considerably across sectors, partially reflecting trade policy impacts. Understanding tariffs' complete corporate effects may require several quarters, particularly as new trade agreements continue emerging.

Multiple countries have established new arrangements, some featuring substantially lower tariffs than those initially declared April 2. Recent announcements indicate the European Union and Japan will face 15% tariffs on U.S. exports, while Indonesia and the Philippines will encounter 19% tariffs. Discussions with China remain active following earlier trade truce developments.

Financial markets have sustained their climb to new peaks as companies report earnings beats and additional trade agreements are finalized. The chart above shows the S&P 500 achieving over a dozen record highs this year, with most occurring within the past month. The Nasdaq has similarly reached historic levels, surpassing its previous December peak, while the Dow approaches record territory. Though current market levels may concern some investors, major indices frequently establish multiple new highs annually during expansion periods.

While markets perform well, concerns about tariffs' economic impact remain. Various economic projections, including Federal Reserve forecasts, suggest inflation may run slightly higher with somewhat slower growth. Industry impacts will vary based on input costs, with import-heavy sectors potentially facing compressed profit margins. However, these projections must be balanced against domestic investment benefits and companies' potential to adapt through innovation and improved efficiency.

Although tariffs have reached historically elevated levels, predictability matters more, as stable business environments enable companies to adapt operations and supply chains more effectively. Looking ahead, the current Wall Street consensus projects S&P 500 earnings growing at a 9.5% annual rate. These forecasts anticipate accelerating growth over the next two years as global trade stabilizes, though significant changes could occur in the interim.

Stock market performance typically aligns with corporate earnings over extended periods. The accompanying chart demonstrates that while S&P 500 prices and earnings don't match perfectly, they follow similar broad patterns. Economic growth drives earnings higher, which subsequently elevates stock prices. Therefore, while the economy and stock market aren't identical, they remain closely connected through corporate performance.

This relationship explains how tariff impacts on profits can affect investors. Market valuation as "cheap" or "expensive" depends not solely on stock prices but also on corporate results. The price-to-earnings ratio represents simply a stock or index price divided by an earnings measure, such as projected twelve-month earnings.

This means that even with unchanged prices, rising earnings improve market attractiveness, and the reverse holds true. The current S&P 500 price-to-earnings ratio stands at 22.2x, significantly above the historical average of 15.8x and approaching the dot-com bubble peak of 24.5x. While current earnings trends appear positive, continued market attractiveness will depend on economic growth and earnings performance.

The bottom line? This earnings season may offer valuable insights into tariff effects on consumers and businesses. For investors, comprehending these developments while maintaining focus on long-term planning remains the optimal approach to achieving financial objectives.

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[1] https://budgetlab.yale.edu/research/state-us-tariffs-july-23-2025

[2] https://insight.factset.com/topic/earnings

[3] https://investor.gm.com/static-files/eaf4a73f-ef85-4134-8533-902e6a9a8177

[4] https://www.clevelandcliffs.com/investors/news-events/press-releases/detail/678/cleveland-cliffs-reports-second-quarter-2025-results