Earnings Reports Show Tariffs Impacting Corporate Profits, Inflation Expected

Earnings season is in full swing this week, providing investors with a clearer picture of how tariffs are impacting corporate profits and, more specifically, how much of the cost is being absorbed by companies and how much is being passed on to consumers. So far, tariffs have not led to a significant surge in inflation, but their effects are anticipated to become more apparent later this year.

Earnings reports for the second quarter will be closely watched, as they will offer insights into the real impact of tariffs on businesses and consumers. Major U.S. banks, including JPMorgan Chase, Citigroup, and Wells Fargo, will report their earnings starting on Tuesday. In the tech sector, Netflix and TSMC will report on Thursday. Additionally, results from industrial companies such as Alcoa, GE Aerospace, and 3M are expected this week.

The consensus estimate is that earnings from S&P 500 companies grew by just 4% in the second quarter compared to the same period last year, marking the slowest pace since 2023 and a significant slowdown from the 13% growth seen in the first quarter. This comes as President Donald Trump’s trade policies have yet to cause a substantial inflation spike, although tariffs are expected to have a more noticeable impact on economic data later in the year.

The consumer price index, set to be released on Tuesday, is expected to show a 0.3% monthly increase for June, up from May’s 0.1% pace. The producer price index, due on Wednesday, is also anticipated to accelerate to 0.2% from 0.1%. This uptick could be due to companies depleting inventories that were stockpiled ahead of the tariffs, forcing them to incorporate more of those costs into the price of their goods.

According to a survey published last week, more than 80% of companies plan to increase prices in the next six months, and 73% have already passed on up to half of the tariff-related costs to consumers. However, this has not been sufficient to maintain earnings, as 57% of firms reported that their gross margins are declining. Economists at Goldman Sachs expect companies to pass on 70% of tariff costs to consumers through higher prices. If this prediction holds true, it would be a more significant impact than some earlier forecasts suggested. Chris Harvey, head of equity strategy at Wells Fargo Securities, previously stated that if tariffs stabilize around 10%, a third of the cost could be absorbed by the importer, a third by companies, and a third by consumers. However, this 10% target appears increasingly optimistic, as Trump has continued to push for higher tariff rates. Goldman Sachs now expects the effective rate to settle around 17%.

Companies that pass on tariff costs risk facing a backlash. The survey indicated that 34% of companies reported customer pushback as a challenge, and 45% noted that sales are already beginning to decline. Additionally, there is one consumer in particular that companies need to avoid annoying: Trump. In May, he warned Walmart not to raise prices after the retail giant indicated that prices could increase on a wide array of products. Trump posted on Truth Social, “Walmart should STOP trying to blame Tariffs as the reason for raising prices throughout the chain. Walmart made BILLIONS OF DOLLARS last year, far more than expected. Between Walmart and China they should, as is said, ‘EAT THE TARIFFS,’ and not charge valued customers ANYTHING. I’ll be watching, and so will your customers!!!”

Capital Economics suggested last week that U.S. firms may absorb more costs, at least in the short term, for political reasons. Regardless, the upcoming earnings reports will provide a clearer picture of who is bearing the brunt of the tariff costs. More pain on the consumer side could fuel inflation and prevent the Federal Reserve from lowering interest rates, which would weigh on the stock market. Conversely, more pain on the corporate side will erode earnings and also weigh on the stock market.