Q2 Earnings Season Preview: Will Tariffs Begin to Bite?

Key Takeaways

• Tariffs will be front and center when companies begin to report their second-quarter earnings results next week.
• Tariffs could shrink margins, put pressure on profits, or prompt price increases.
• Some sectors, like consumer cyclicals and basic materials, could see a major hit from tariffs, while others will be more insulated.

Investors are still trying to get a grip on tariffs’ impact on the economy and the stock market. As the second quarter’s earnings season gets underway next week, analysts will be laser-focused on how President Donald Trump’s import taxes are affecting corporate bottom lines.

So far, the impact of tariffs has been very muted when it comes to economic data on inflation, consumer spending, and business activity. That’s in part thanks to companies stockpiling inventories that will likely be affected earlier this year. However, firms in affected industries could see higher costs and tighter margins, and those with limited pricing power may be forced to absorb more of the tariffs than their counterparts with wider competitive advantages, which can pass more of those costs on to consumers. Analysts say second-quarter earnings results could show evidence of these trends.

Just as critical for market watchers over the next few weeks will be the resumption of forward earnings guidance, which many firms opted out of in the first quarter, when the policy outlook was changing rapidly.

The Trump administration recently extended its deadline for negotiations with its trading partners to Aug. 1. That means considerable uncertainty remains around the ultimate shape of US trading policy, but there will be plenty of discussion throughout earnings seasons about how companies are preparing for new levies, or how they are handling tariffs that have already been implemented. Here’s what investors need to know.

Watch for an Earnings Slowdown

Analysts expect earnings growth to slow somewhat over the year as tariffs take effect and begin to eat away at corporate balance sheets. Overall, they forecast 5% annual earnings growth for the S&P 500 Index in the second quarter, according to FactSet’s consensus estimates. That’s down from 13% growth in the first quarter. Earnings growth hasn’t been that slow since the fourth quarter of 2023, according to FactSet. Analysts expect 9.4% earnings growth for the calendar year 2025, down from 11% growth in 2024.

That slowdown has implications for investors. “Now is a better time to be doing some profit-taking rather than put new money into the market,” says Dave Sekera, chief US market strategist for Morningstar. Still, earnings often surprise to the upside (and estimates are often revised down ahead of reporting), leading to beats that surpass early estimates. That was the case in the first quarter, when analysts expected 6.8% growth before companies began reporting.

Sector by Sector

That trend won’t be consistent from sector to sector, however. In a note to clients at the end of June, analysts from Goldman Sachs led by David Kostin said they expect a onetime boost to inflation caused by tariffs to weigh more heavily on cyclical sectors, which are sensitive to changes in the economic environment.

FactSet consensus data shows that analysts expect 26% year-over-year declines in earnings in the energy sector of the S&P 500 Index in the second quarter, along with 5.6% declines in the consumer discretionary sector and 3.7% declines in the basic materials sector.

In a bear case for tariffs, Morningstar’s equity research team expects the consumer cyclical and basic materials sectors to be harmed the most. Damien Conover, Morningstar’s director of equity research for North America, explained recently that retail and apparel companies could see a significant hit. “This is a very sweet spot for [tariff damage],” he says. “A very high percentage of that material is manufactured internationally, and [when] hit with tariffs, that’s going to bring down the valuations for these companies.”

Earnings in the communication services sector of the index, on the other hand, are expected to rise nearly 30% in the second quarter, according to FactSet estimates. Analysts are also looking for 16.0% growth in the information technology sector, 3.5% earnings growth in the healthcare sector and 4.5% growth in the utilities sector.

How Long Before Tariffs Are Felt?

Analysts at Goldman Sachs have said they expect “the digestion of tariffs to be a gradual process” rather than a sudden shock to bottom lines. That tracks with other views on Wall Street. For instance, UBS economists don’t expect to see major changes in consumer price data until the July Consumer Price Index report, which will be released in August.

In a recent note to clients, Goldman’s analysts say larger firms in goods related industries appear to have built up more inventory than usual to help weather the impact of new taxes. Preliminary surveys show companies plan to absorb more of the new costs than initially expected. “Recent company commentary shows S&P 500 firms plan to use a combination of cost savings, supplier adjustments, and pricing to offset the impact of tariffs,” they wrote.

Keep an Eye on Guidance

In the first quarter, corporate earnings reports were noticeably light on guidance. Without concrete policy on trade in place, some companies said they weren’t confident enough in the outlook for the near and medium terms to give investors a sense of how the next few years could look.

Sekera thinks this trend could continue through the second-quarter earnings season. He warns that the details of the deals the Trump administration is negotiating this summer remain murky. “It’s still the same outstanding questions that we’ve had,” he says.

He points to FedEx FDX, which did not offer full-year guidance for 2026 when it reported fiscal fourth-quarter earnings at the end of June, citing increased macroeconomic uncertainty. It did offer guidance for the upcoming quarter.

In her recent outlook, Schwab chief investment strategist Liz Ann Sonders writes that guidance (and earnings surprises) are likely to take on “heightened importance” over the next few months “as markets remain sensitive to forward-looking commentary, especially amid policy uncertainty and instability related to trade, tariffs, and interest rates.” In other words, big surprises from earnings season could mean big moves in the stock market.

Beyond Tariffs

While the situation around US trade policy is still evolving, Sekera says he’ll be focusing on the fundamentals. In the early days of earnings season, he’ll see whether big banks are bulking up their loan loss reserves—a sign that they expect the economy to slow. He’ll be watching semiconductor maker ASML Holding ASML for clues about demand for artificial intelligence infrastructure from mega-cap tech companies, which could give investors an early read on the AI landscape overall. Meanwhile, Pepsi’s PEP results could provide a window into how new weight-loss drugs are affecting the food and drink industry.