Assessing Retail Sector Earnings in Q2 2025: A Tale of Two Retailers (S&P 500 vs. S&P 600)

The Q2 2025 retail sector earnings season painted a stark contrast between large-cap and small-cap retailers. The S&P 500’s retailers delivered robust performance, with a blended year-over-year earnings growth rate of 11.8% and 81% of companies exceeding earnings per share (EPS) estimates [1]. In contrast, the S&P 600’s small-cap retailers posted a modest 2.5% earnings increase and 1.9% revenue growth, with 70.4% beating EPS estimates and 66.7% surpassing revenue forecasts [1]. This divergence underscores the structural advantages of large-cap players in navigating macroeconomic headwinds, including tariffs, Amazon’s dominance, and shifting consumer preferences toward essential goods.

The S&P 500: Resilience Through Scale and Strategy

Large-cap retailers leveraged scale, supply chain agility, and strategic focus on essential goods to outperform. Walmart, for instance, capitalized on its omnichannel infrastructure and grocery dominance, with 60% of its sales tied to essentials [4]. Its “Rollbacks” initiative and one-hour delivery services drove traffic while maintaining margins [1]. Similarly, Amazon’s North America retail operating margin expanded to 5.98% in Q2, despite tariff pressures, by absorbing costs and expanding delivery networks [1]. The company’s advertising revenue surged 22% year-over-year to $15.7 billion, offsetting margin compression [3].

The S&P 500’s outperformance was also fueled by sectoral strength. Communication Services, Information Technology, and Financials drove earnings growth, while the Energy sector declined [6]. Retailers like Target and Home Depot mitigated tariff impacts through supplier diversification and inventory pre-orders [5]. For example, Target reduced its reliance on China from 60% in 2017 to 30% in 2025, with plans to drop it further by 2026 [5].

The S&P 600: Struggling Against Tariffs and Discretionary Pressures

Small-cap retailers faced a more challenging environment. The S&P 600’s 4.9% quarterly gain lagged behind the S&P 500’s 10.9% [6], reflecting vulnerabilities in discretionary categories. Retailers like TJX Companies and Macy’s navigated tariffs by capitalizing on off-price models and flexible sourcing [4], but many struggled to absorb costs. A KPMG survey found that 78% of small-cap retailers cited tariffs as a significant earnings drag, with 37% delaying capital investments by 7–12 months [2].

Discretionary goods retailers, such as furniture and apparel brands, were particularly hard-hit. Target’s in-store comp sales fell 5.7% in Q2, as consumers deferred non-essential purchases [3]. Meanwhile, Amazon’s Prime Day sales—driven by essentials—rose 5% year-over-year, further squeezing small-cap competitors [3]. The S&P 600’s consumer discretionary sector saw 30 credit rating downgrades in Q2 alone, with a median default probability of 2.95% [1].

Amazon’s Dual Role: Competitor and Catalyst

Amazon’s influence was a double-edged sword. While its e-commerce dominance pressured smaller rivals, its strategies also highlighted pathways for resilience. The company’s AI-driven logistics and generative AI tools enhanced customer experience, driving 30.3% higher online sales during Prime Week [3]. However, Amazon’s advertising-centric model raised concerns about a “pay-to-play” ecosystem, with sellers increasingly forced to allocate budgets for visibility [3].

For large-cap retailers, Amazon’s presence spurred innovation. Walmart’s retail media platform, Walmart Connect, generated $10 billion in revenue, leveraging its 33.4% gross margin [2]. Conversely, small-cap retailers lacked the scale to compete in advertising or AI, exacerbating their vulnerability.

Tariffs: A Tailwind for Essentials, a Headwind for Discretionary

Tariff policies amplified the divide between essential and discretionary goods. Essential retailers like Walmart and Kroger maintained stable margins by absorbing 10–30% of tariff costs [5], while discretionary players passed on 50–100% of costs to consumers [3]. The S&P 500’s Consumer Staples sector remained resilient, whereas the S&P 600’s Consumer Discretionary sector faced margin compression.

The Trump-era tariffs on China, initially set at 145%, were reduced to 30% after a U.S.-China trade agreement [4]. However, legal disputes over these policies created lingering uncertainty. Retailers like Best Buy and Macy’s adopted real-time supply chain adjustments, but small-cap peers often lacked the agility to respond [5].

Investment Implications: Focus on Resilience and Adaptability

The Q2 2025 earnings season underscores the importance of strategic positioning. Large-cap retailers, with their diversified supply chains, digital infrastructure, and focus on essentials, are better equipped to weather macroeconomic volatility. Conversely, small-cap retailers face elevated risks from tariffs and discretionary spending shifts. Investors should prioritize S&P 500 names with strong retail media platforms (e.g., Walmart, Amazon) and those leveraging AI for operational efficiency. For the S&P 600, opportunities may lie in companies with niche essential goods offerings or those successfully pivoting to off-price models.

Source:
[1] Amazon earnings preview: Fiscal Q2 2025 [https://www.spglobal.com/market-intelligence/en/news-insights/research/amazon-earnings-preview--fiscal-q2-2025-]
[2] Q2 Retail Earnings Preview: Demand in Question [https://www.schwab.com/learn/story/retail-earnings-preview]
[3] Retail earnings highlight consumer trade-offs amid tariffs [https://qz.com/us-economy-walmart-target-home-depot-lowes-q2-2025]
[4] Navigating Tariff Uncertainty: Strategic Opportunities for Retailers in 2025 [https://www.ainvest.com/news/navigating-tariff-uncertainty-strategic-opportunities-retailers-2025-2508/]
[5] Retail Tariff Management - How to Mitigate Procurement Uncertainty in 2025 [https://suplari.com/blog/how-retailers-can-respond-to-tariff-uncertainty/]
[6] S&P 500 Earnings Season Update: August 8, 2025 [https://insight.factset.com/sp-500-earnings-season-update-august-8-2025]