While the U.S. Federal Reserve (Fed) is clearly concerned about the uncertainty surrounding the impact of tariffs on the economy, supply chains, and inflation, Wall Street analysts appear to be more confident that the unknown will not likely extend to S&P 500 Index earnings. Rather, analyst consensus expectations call for 9% earnings growth on 5% revenue growth for the S&P 500 Index in 2025 according to FactSet as of July 11th.
If the S&P 500 Index’s price-to-earnings ratio is the same at the end of this year as it was at the end of 2024, it would imply a 9% price return for the Index over 2025 plus any dividends. This suggests that bottom-up analysts do not see tariffs as a large hinderance to earnings growth for large U.S. companies in aggregate.
Tariffs and the Inflation of Goods
Tariffs directly increase the cost of imported goods, especially intermediate and consumer goods. When firms face higher input costs due to tariffs, they often pass some or all of these costs onto consumers. This pass-through effect raises the prices of final goods and contributes to goods inflation, which is a component of overall inflation that tracks the price movement of physical items, such as food, vehicles, and electronics.
Goods inflation remains a particular concern for policymakers due to residual supply chain frictions and an ongoing transition in global trade patterns. Tariffs imposed on Chinese imports in prior years, particularly those in the 2018–2020 period, have shown that even targeted levies can have broader inflationary effects. For example, a 10% tariff on a popular consumer electronic component can ripple through entire production chains, pushing up retail prices. Additional tariffs in 2025 could add at least 0.5% to inflation according to the Fed’s estimates (The Impact of Tariffs on Inflation – Federal Reserve Bank of Boston).
This inflationary impact could complicate the Fed’s policy path. If tariffs lead to sticky goods inflation, the Fed may delay rate cuts and keep financial conditions restrictive for longer. This scenario would directly influence corporate earnings by raising borrowing costs and reducing consumer spending power.
Tariffs and S&P 500 Index Earnings
Many S&P 500 Index companies have extensive global supply chains and rely heavily on international sales. Tariffs can compress profit margins both directly and indirectly through retaliatory tariffs that restrict market access abroad. For example, technology and industrial companies, which together account for a substantial portion of S&P 500 Index earnings, are particularly vulnerable to trade disruptions.
However, the real-world implications of these potential disruptions and headwinds may take months to materialize. Suffice it to say that S&P 500 Index earnings growth momentum remains strong overall. The U.S. economy is primarily a service-based economy where international trade in goods as a percentage of total economic activity is relatively small compared to other major economies. As a result, we expect that tariffs will have a limited impact on overall economic growth and corporate earnings.
At the same time, certain industries, especially the automotive industry, are more vulnerable than others and the true impact of the changing tariff regime may take months to materialize, or even longer. For example, it takes years to build new manufacturing facilities. Until these issues of supply chain dynamics and cost passthroughs are resolved, uncertainty will persist.
Despite these uncertainties, we look for U.S. economic momentum to continue and bring corporate revenue and earnings along with it.
Originally published at Stringer Asset Management
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Index Definitions:
S&P 500 Index – This Index is a capitalization-weighted index of 500 stocks. The Index is designed to measure performance of a broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.