How Corporate Earnings Show The Impact Of Tariffs

Investors always watch company earnings to see how businesses are doing. But this earnings season is extra important because of tariffs. Even though stock markets have hit new highs as trade tensions have calmed down, there's still uncertainty about how tariffs might affect consumers and businesses. The good news is that new trade deals are being announced and companies are reporting better-than-expected earnings.

Recent data shows that consumer spending stays strong and corporate earnings keep growing faster than expected. According to the Yale Budget Lab, consumers now face an average tariff rate of 20.2% as of July 23 - the highest level since 1911.1 But this hasn't shown up in consumer spending data yet, which suggests some businesses are absorbing tariff costs instead of passing them on to customers right away.

Company earnings are doing better than expected

How do tariffs work and where might we see their effects? Tariffs are fees collected by the government on imported goods. But the real costs are paid either by companies that export to the U.S. or by U.S. consumers and businesses through higher prices. How much each group pays depends on their "pricing power" - basically, how much they can control prices.

For example, the U.S. needs materials called "rare earth metals" for electronic devices, and almost all of these come from other countries. Since there are few other sources, any tariffs would likely be passed directly to consumers. This is why the administration has worked on agreements to expand imports of rare earth metals with China and why there's more interest in making these materials domestically.

The car industry is different because it's very competitive. There are domestic car makers and many countries that want to export cars 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 cars from other nations and domestic producers.

Markets keep hitting new record highs

Stock markets have kept reaching new record highs as companies report better earnings and new trade deals are announced. As the chart shows, the S&P 500 has hit over a dozen new records this year, mostly in the past month. The Nasdaq has also hit record levels, and the Dow is near a new record too.

While tariffs are historically high, what matters more is that they are predictable. A stable business environment allows companies to adapt their operations and supply chains more effectively. Wall Street experts predict S&P 500 earnings will grow at a 9.5% annual rate, with growth expected to speed up over the next two years as global trade stabilizes.

Earnings drive stock returns over time

The stock market tends to follow corporate earnings over the long run. The chart shows that while S&P 500 prices and earnings don't match up perfectly, they follow the same general trends. This is because economic growth boosts earnings, which pushes stock prices higher.

This is how tariffs' impact on profits can affect investors. Whether the stock market is "cheap" or "expensive" depends not just on stock prices but also on how well companies perform. The price-to-earnings ratio is simply a stock's price divided by its earnings per share.

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

Want to learn how Keep It Simple Financial Planning can help? Please don’t hesitate to reach out here.

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