Investors always watch company earnings (profits) to see how businesses are doing. This earnings season is especially important because of tariffs. Tariffs are fees that companies must pay when bringing goods into the United States from other countries. Even though major stock market indexes have hit new record highs as trade tensions have calmed down, there is still uncertainty about how tariffs might impact everyday consumers and businesses. The good news is that new trade deals are being made, and companies are reporting profits that are better than expected.
Recent numbers show that consumer spending stays strong and company profit growth keeps beating what experts predicted. The Yale Budget Lab found 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 means that some businesses are taking on the cost of tariffs themselves instead of immediately raising prices for customers. Companies seem able to do this because they have strong profit growth and healthy profit margins (the amount of money left over after paying all costs).
Looking at specific numbers, just over one-third of S&P 500 companies have reported their second quarter earnings results. Of these, 80% delivered positive earnings-per-share surprises (meaning they made more money per share than expected). The combined 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 profits are beating expectations so far
How are tariffs paid, and how might they appear in company financial reports? While tariffs are collected as revenue by the government, the real costs are paid either by those 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” – 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 from other countries. Since there are few other sources available, any tariffs would likely be passed directly to consumers through higher prices. This is one reason the current administration has worked on an agreement to expand imports of rare earth metals with China, and why there is more interest in producing these materials domestically.
In contrast, the car industry is highly competitive with both domestic manufacturers and many countries that want to export vehicles to the U.S. If tariffs are placed on cars from one country, those manufacturers may choose to absorb some of the costs to stay competitive with vehicles from other nations and domestic producers.
So, in the short term, the effect of tariffs depends on factors like how competitive an industry is and whether consumers and businesses have other options. In the long term, supply chains (the networks companies use to get materials and products) can adapt to new conditions and currency values can adjust.
Therefore, how tariffs impact earnings and how companies respond 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 flat-rolled steel maker in the U.S., announced better than expected earnings for the second quarter, benefiting from tariffs that reduced steel imports and helped their business.4
The chart above shows that earnings expectations vary greatly across different sectors, partly due to the impact of trade policies. 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 are ongoing after earlier developments on a trade truce.
Markets continue to reach new all-time highs
Stock markets have continued to reach new all-time highs as companies report better-than-expected earnings and new trade deals are announced. As the chart above shows, the S&P 500 (a stock index that tracks 500 large U.S. companies) has reached over a dozen new record highs this year, with most of these happening over the past month. The Nasdaq (another stock index) has also hit record levels, topping its historic peak from last December, and the Dow (yet another stock index) is near a new record as well. Although markets at these levels may make some investors nervous, the reality is that major stock indexes can reach many new all-time highs each year during periods when markets are growing.
Markets are performing well, but concerns about how tariffs might impact the economy continue. Some economic forecasts, including those by the Federal Reserve (the U.S. central bank), suggest that inflation (rising prices) could be slightly higher and economic growth somewhat slower. The impact on each industry will depend on their input costs (what they pay for materials and supplies), 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. A stable business environment allows companies to adapt their operations and supply chains more effectively. Looking ahead, current Wall Street consensus estimates predict that S&P 500 earnings will 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 returns
The stock market tends to follow corporate earnings over the long term. The chart shows that while the price and earnings of the S&P 500 do not line up perfectly, they follow the same broad trends. This is because economic growth boosts earnings, which in turn pushes stock prices higher. So, while the economy and the stock market are not exactly the same thing, the two are closely related through how companies perform.
This is how the impact of tariffs 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 are performing. 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 to investors, 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 company 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