Trade Deals and Earnings Resilience: A New Era of Market Optimism

The normalization of U.S. trade policy since 2023 has reshaped global markets, creating a complex but ultimately optimistic environment for long-term investors. While tariffs initially sparked inflationary pressures and economic drag, recent trade agreements—most notably the U.S.-EU deal—have recalibrated the landscape, offering a path to stability. Coupled with resilient corporate earnings, these developments suggest a market poised for sustained growth.

Trade Deals as Economic Catalysts

The U.S.-EU trade framework, finalized in July 2025, represents a pivotal shift. By capping U.S. tariffs on EU imports at 15% and securing $750 billion in U.S. energy purchases and $600 billion in EU investments by 2028, the agreement has stabilized trade flows while protecting strategic domestic industries. The Yale Budget Lab estimates that this deal could bolster U.S. GDP by offsetting the drag from broader tariffs, which remain elevated at an average of 18.2% in 2025.

However, the road to normalization has been rocky. Tariffs initially drove up consumer prices by 1.8% in the short run and 1.5% in the long run, disproportionately affecting low-income households. Sectors like apparel and footwear faced price spikes of 37% and 39%, respectively, as companies passed on costs. Yet, the U.S.-EU pact has mitigated some of these pressures, particularly in manufacturing, where investment inflows are expected to drive productivity gains.

Earnings Resilience in a High-Tariff Environment

Corporate earnings have shown surprising adaptability. S&P 500 companies reported 78% of Q1 2025 earnings above estimates, with 79% doing the same in Q2. This resilience stems from a mix of cost controls, margin management, and strategic pricing. For example, General Motors absorbed a $1.1 billion tariff hit but still exceeded adjusted EPS expectations by leveraging international profits. Similarly, Johnson & Johnson reduced its tariff impact estimate from $400 million to $200 million by optimizing supply chains.

The key to this resilience lies in profit margins. U.S. corporate margins are 60% higher than in 2018–2019, allowing firms to absorb a larger share of tariff costs without collapsing. Goldman Sachs notes that companies passed on about 70% of tariff costs to consumers, but this pass-through has been less than feared, with many firms opting to absorb costs to maintain customer loyalty.

Long-Term Investment Implications

The interplay between trade normalization and earnings resilience creates a compelling case for long-term investors. Sectors aligned with trade agreements—such as energy, manufacturing, and AI-driven innovation—are likely to outperform. The U.S.-EU deal, for instance, could boost energy stocks as the U.S. meets its energy export commitments. Additionally, AI adoption is driving productivity gains, with Microsoft and ServiceNow reporting cost savings of $100 million+ through automation.

However, risks remain. The U.S. economy's long-term GDP is projected to shrink by 0.6% due to tariffs, and sectors like retail and consumer goods face margin pressure. Investors should prioritize companies with strong balance sheets and pricing power, as these firms can weather cost shocks. The One Big Beautiful Bill Act (OBBBA), which incentivizes R&D and capital expenditures, further supports innovation-driven sectors like semiconductors and green energy.

Strategic Recommendations

1. Energy and Manufacturing Exposure: Invest in firms benefiting from U.S.-EU energy commitments and manufacturing investments. Energy majors like ExxonMobil and industrial conglomerates such as 3M are well-positioned.
2. AI and Innovation Leaders: Prioritize companies leveraging AI to offset trade costs. Microsoft, NVIDIA, and Amazon are key plays in this space.
3. Defensive Sectors with Pricing Power: Utilities and healthcare firms, less exposed to tariffs, offer stability. Companies like Pfizer and Dominion Energy provide reliable dividends.
4. Avoid Overexposed Retailers: Apparel and consumer goods firms, such as Nike and Target, face margin compression. These stocks are best suited for short-term hedging.

Conclusion

The normalization of trade policy and corporate earnings resilience are reshaping the investment landscape. While tariffs introduced near-term headwinds, strategic trade agreements and corporate adaptability are creating a foundation for long-term growth. Investors who align with sectors poised to benefit from these dynamics—energy, AI, and innovation—stand to capitalize on a market that is not only surviving but thriving in a post-tariff world.