Image Source: Unsplash

Second quarter earnings season is right around the corner, and the key question among investors is how will the Trump tariffs impact earnings?

The tariffs went into effect in April, and while the larger reciprocal tariffs were paused, the baseline 10% tariffs for most imports remained.

According to the Yale Budget Lab, as of May 12, the average effective tariff rate was about 14%, the highest since 1938. That’s up from about a 3% rate one year ago in Q2 2024. And according to researchers at Goldman Sachs, that effective rate is anticipated to rise to about 17% later this year.

We’ll begin to better understand the impact of tariffs on corporate earnings next week when Q2 earnings reports start to roll in. Will they be passed on to consumers or absorbed by the companies?

“Clients have been keenly focused on who will ultimately shoulder the cost of tariffs,” David Kostin, Goldman Sachs chief US equity strategist, said in a recent report. Kostin and his team have been examining that question and published some insights that might provide some clarity amid the uncertainty.

Most tariff costs will be passed on to consumers

Goldman Sachs economists estimate that companies will pass on 70% of the direct cost of tariffs to consumers through higher prices. Businesses are only expected to bear 15% of the tariff cost burden – which is the same percentage for foreign exporters. However, they note that they haven’t yet had a major impact on prices, which rose less than anticipated in May.

The firm also points out that its projections vary from other recent business surveys, which say consumers will foot 49% of the tariff impact, with US businesses absorbing 39% and foreign exporters eating just 12%.

“Early earnings results offer conflicting messages on the margin outlook,” Kostin wrote in the report. “Companies have so far only announced modest price increases this year, although increases have been larger among firms most exposed to tariffs.”

Goldman Sachs analysts suggest that revisions to analysts estimates for Q2 corporate margins indicate that some companies may not be able to fully offset the tariff impacts. Others have been able to do so by tapping into built-up inventories, pre-tariffs, to minimize the tariff hit.

Earnings growth expected to slow

Overall, Goldman Sachs analysts project year-over-year earnings per share growth for Q2 to decelerate to 4%, down from 12% growth in Q1. Further, margins are anticipated to contract by 50 basis points to 11.6% from 12.1%. 

“We expect the S&P 500 in aggregate will beat the low bar set for the second quarter,” Kostin wrote.

Also, Goldman Sachs researchers don’t expect tariffs to curtail overall capital spending. In fact, analysts have raised their capital spending expectations. But capital spending varies wildly by sector and company. For example, companies investing heavily in AI are ramping up totals, while most other capital expenditures have been cut, due mainly to policy uncertainty and tariffs.

For the full year, Goldman Sachs forecasts earnings among S&P 500 companies to grow 7% to $262 per share. That is more optimistic than the 6% increase to $260 per share that is the median among analysts.

As for the S&P 500, Kostin’s team anticipates it reaching 6,500 in 12 months, which would represent a 4% over the current level.

More By This Author:

Wall Street Analysts Are Bullish On These 2 Casino Gambling Stocks
3 Stock Market Trends To Watch In 2025 And Beyond
GMS Stock Skyrockets As Suitors Jockey To Buy It