Tariffs' Earnings Impact: A Catalyst for S&P 500 Sector Reassessment

The escalating U.S. tariff regime is reshaping corporate earnings dynamics across the S&P 500, forcing investors to reevaluate sector resilience. As Goldman Sachs' latest forecasts reveal stark divergences in margin contraction, tariff pass-through rates, and inventory strategies, the second quarter of 2025 has become a critical inflection point. For portfolios, this means shifting capital toward tech/healthcare sectors with pricing power and inventory buffers, while avoiding trade-exposed industries where margin erosion is most acute.

Margin Contractions: Winners and Losers in the Tariff Wars

Goldman Sachs' analysis underscores a bifurcated landscape. The Energy sector faces the deepest margin contraction, with net profit margins projected to drop 1.6% year-over-year (to 7.5%)—well below its five-year average. This reflects both geopolitical supply chain disruptions and tariff-driven cost pressures. In contrast, sectors insulated from tariffs or positioned for domestic growth are thriving. Communication Services margins are expected to surge 2.4% year-over-year to 14.0%, fueled by AI-driven efficiency gains and strong demand for digital services. Similarly, Industrials margins are rising 2.2% above their five-year average, benefiting from infrastructure spending and reduced global supply chain reliance.

Inventory Strategies: A Buffer Against Tariff Headwinds

Companies with foresight have used inventory buffers to shield margins. Goldman notes that firms in utilities and information technology—critical to AI and data center infrastructure—built pre-tariff inventories, stabilizing their input costs. This explains why sectors tied to AI (e.g., semiconductors) have maintained capital expenditure (CapEx) growth despite broader sector declines.

However, aggregate S&P 500 inventory-to-sales ratios remain stagnant, highlighting uneven preparedness. Sectors like consumer staples and real estate, which underperformed in Q2, failed to leverage inventory strategies effectively, leaving them exposed to margin compression.

Tariff Pass-Through: The Limits of Price Increases

While Goldman assumes companies can pass through 70% of tariff costs to consumers, reality has been less cooperative. May's consumer price index showed muted inflation, suggesting many firms are absorbing costs rather than raising prices. This has hit sectors with high tariff exposure but low pricing power hardest. For instance, manufacturers reliant on imported components face a double whammy: margin erosion and stagnant CapEx growth as they await policy clarity.

Yet sectors with pricing power, like healthcare, are raising prices while investing in AI-enabled R&D. Biogen's recent earnings call, for example, highlighted margin resilience through drug price hikes and cost efficiencies.

Q2 Earnings: A Litmus Test for Sector Resilience

The second-quarter earnings season will be pivotal. Analysts project S&P 500 EPS growth to slow to 4% year-over-year—a deceleration from Q1's 12%—as margin pressures bite. However, Goldman's $262 full-year EPS target hinges on tech/healthcare outperformance.

Investors should scrutinize Q2 earnings calls for three signals:
1. Inventory utilization: Companies using pre-tariff stockpiles or renegotiating supplier contracts.
2. Margin guidance: Firms with pricing power or cost controls.
3. CapEx trends: Sectors like utilities and IT boosting spending on AI infrastructure versus those cutting budgets.

Portfolio Rebalancing: Shift to Tech/Healthcare, Avoid Tariff Traps

The data suggests a clear path for investors:
- Overweight: Tech (e.g., NVIDIA, Microsoft), healthcare (e.g., Biogen, Pfizer), and industrials with domestic exposure. These sectors are driving Goldman's 6,500 S&P 500 target and offer defensive characteristics.
- Underweight: Energy, consumer staples, and sectors with high global supply chain reliance. Their margin trajectories are deteriorating fastest.

Risks and Uncertainties

• Policy Volatility: Trump's tariff pause expiration and potential new levies could disrupt current strategies.
• Demand Shock: If consumer spending weakens further, even tech/healthcare may face pricing limits.
• Inventory Depletion: Pre-tariff stockpiles may run low by year-end, amplifying margin pressures in late 2025.

Conclusion

The tariff regime has turned sector analysis into a survival game. Investors must prioritize firms with inventory buffers, pricing power, and exposure to domestic growth drivers like AI. Q2 earnings are the proving ground: those failing to adapt will see margins collapse, while winners will dominate the next phase of the cycle. The message is clear—reweight portfolios toward resilience, or risk falling victim to the tariff divide.

The S&P 500's path to 6,500 hinges on sector differentiation. Investors who align with tariff-resistant sectors now will be best positioned to navigate 2025's economic crossroads.