What Company Earnings Tell Us About Trade Fees

Chris
July 29, 2025

Investors always pay attention to company earnings to understand how businesses are doing. But this earnings season is especially important because of tariffs (which are fees on imported goods). Even though major stock market indexes have hit new record highs as trade tensions have calmed down, there’s still uncertainty about how tariffs might impact everyday consumers and businesses. The good news is that new trade deals are being announced, and companies are reporting earnings that are better than expected.

Recent data shows that consumer spending stays strong and company earnings growth keeps beating what experts predicted. The Yale Budget Lab reports that consumers face an average tariff rate of 20.2% as of July 23 – the highest level since 1911.¹ The fact that this hasn’t shown up in consumer spending data suggests that some businesses are eating the cost of tariffs rather than immediately raising prices for customers. Companies seem able to do this because of strong earnings growth and healthy profit margins (the money left over after paying all costs).

Looking at the numbers, just over one-third of S&P 500 companies have reported their second quarter earnings. Of these, 80% delivered positive earnings-per-share surprises (meaning they earned more per share than expected). The blended earnings growth rate of 6.4% beat expectations of 4.9%, according to FactSet.² While this growth rate is lower than recent quarters, it suggests that an “earnings recession” – a sharp drop in company profits like what happened in 2020 or 2022 – is less likely than originally feared.

Company earnings are doing better than expected so far

How do tariffs work, and how might they appear in company financial reports? While tariffs are collected as government revenue, the real costs are paid either by those who export goods to the U.S., or by U.S. consumers and businesses through higher prices. How much each group pays depends on their “pricing power” (their ability to set prices).

For example, the U.S. depends on materials called “rare earth metals” for electronic devices, and nearly all of these are imported. Since there are few other sources, any tariffs would likely be passed directly to consumers. This is why the administration has worked on an agreement to expand rare earth metal imports with China, and why there’s greater interest in producing these materials domestically.

In contrast, the car industry is highly competitive with both domestic manufacturers and many countries trying to export vehicles to the U.S. If tariffs are put on cars from one country, those manufacturers might choose to absorb some costs to stay competitive with vehicles from other nations and domestic producers.

So in the short term, tariff effects depend on factors like how competitive an industry is and whether consumers and businesses have other options. In the long term, supply chains (the networks that move goods from producers to consumers) can adapt to new conditions and currency values can adjust.

Therefore, how tariffs impact earnings and company responses varies greatly by industry. For instance, General Motors reported that tariffs cost $1.1 billion in profits during the second quarter, with profit margins falling from 9% to 6.1%.³ On the other hand, Cleveland-Cliffs, a U.S. flat-rolled steel maker, announced better than expected earnings for the second quarter, benefiting from tariffs that reduced steel imports.⁴

The chart above shows that earnings expectations vary greatly across different sectors, partly due to trade impacts. It may take several quarters to understand the full effects of tariffs on companies, especially as new trade agreements are announced.

Several countries have agreed to new arrangements, some with significantly lower tariffs than originally declared on April 2. It was recently announced that the European Union and Japan will face 15% tariffs for goods exported to the U.S., and Indonesia and the Philippines will face 19% tariffs. Meanwhile, discussions with China continue after earlier developments on a trade truce.

Markets keep reaching new record highs

Markets have continued reaching new record highs as companies report earnings beats and new trade deals are announced. As the chart above shows, the S&P 500 has reached over a dozen new record highs this year, with most achieved over the past month. The Nasdaq has also hit record levels, topping its historic peak from last December, and the Dow is near a new record as well. While markets at these levels may make some investors nervous, the reality is that major indexes can reach many new record highs each year during market expansions (periods when the market generally rises).

Markets are performing well but concerns about tariff impacts on the economy continue. Some economic forecasts, including those by the Federal Reserve (the U.S. central bank), suggest that inflation could be slightly higher and growth somewhat slower. The impact on each industry will depend on their input costs, with those that import more facing lower profit margins. However, these estimates must be weighed against the benefits of domestic investment and the potential for companies to adapt through innovation and greater efficiency.

While tariffs are historically high, what matters more is that they are predictable, since a stable business environment allows companies to adapt their operations and supply chains more effectively. Looking ahead, current Wall Street consensus estimates (what most analysts expect) are for S&P 500 earnings to rise at a 9.5% annual growth rate. These same forecasts expect growth to speed up over the next two years as global trade stabilizes, although much could change between now and then.

Earnings are an important long-term driver of stock returns

The stock market tends to follow company earnings over the long run. The accompanying chart shows that while the price and earnings of the S&P 500 don’t line up perfectly, they follow the same broad trends. This happens because economic growth boosts earnings, which in turn pushes stock prices higher. So while the economy and the stock market are not the same thing, the two are closely related through company performance.

This is how tariff impacts on profits can affect investors. Whether the stock market is “cheap” or “expensive” depends not just on stock prices but also on company performance. The price-to-earnings ratio (P/E ratio), for instance, is simply the price of a stock or index divided by some earnings measure, such as expected earnings over the next twelve months.

What this means is that even if prices don’t change, increasing earnings will make the market more attractive, and vice versa. The current S&P 500 price-to-earnings ratio is 22.2x, well above the historical average of 15.8x, and is approaching the historic dot-com bubble peak of 24.5x. Current earnings trends are positive, but whether the stock market continues to be attractive will depend on economic growth and earnings.

The bottom line? The current earnings season could provide insights into how tariffs affect consumers and businesses. For investors, understanding these trends while staying focused on long-term planning are still the best ways to achieve financial goals.

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

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