Goldman Sachs warns U.S. stocks face first major test from earnings reports amid tariff impacts

The second-quarter Earnings Reports season for US stocks is set to kick off on July 15. According to Goldman Sachs, there is an expected slowdown in S&P 500 profit growth to about 4% in the second quarter, hitting a two-year low. This deceleration is primarily linked to shrinking profit margins as companies grapple with the burden of absorbing more tariff costs.

The chief US stock strategist at Goldman Sachs, David Kostin, and his team have sounded the alarm on the impact of rising tariff expenses on US companies. The June 27 report pointed out that profit margins will face immense strain and the growth of the S&P 500 index is anticipated to decrease significantly. Trump’s trade policies are to blame for this as the year-on-year rise in S&P 500 EPS in the second quarter is expected to drop from 12% in the prior quarter to a mere 4%. Profit margin pressure seems to be the key driver, with only a 13 basis points expansion year over year. EPS estimates suggest that there will be a mere 2.6% growth between April and June, marking the smallest increase in the last couple of years.

Implications have been dire for the US effective tariff rate, soaring from 3% at the start of the year to 13%, indicating a 10 percentage point spike. Economists at Goldman Sachs foresee a further escalation to 17% in the near future. While consumers are anticipated to bear a substantial share of direct tariff expenses, recent business surveys hint at lower-than-projected rates for cost transfers. Analysts stress that if companies end up having to absorb a larger portion of tariff costs, this could put additional strain on corporate profit margins.

Despite the challenging landscape, Goldman Sachs holds firm on its predictions of 7% EPS growth for the S&P 500 in 2025. Additionally, they anticipate the index to ascend by 5% to reach 6,500 points over the next year. The target set for the index by the year’s end is 6,100 points.

As the first Earnings Reports season following the tariff implementation unfolds, a mixed bag of results from some US companies has surfaced. The General Mills’ stock plummeted last week as the company foresaw a gloomy performance and highlighted tariff-related hindrances. In contrast, Nike’s shares soared with the promise of mitigating tariff effects through various measures, though conceding that this would require time and have some immediate impact on profit margins.

Analysts concur that S&P 500 earnings growth in the second quarter could see a significant deceleration to 4% from the promising 12% in the preceding quarter. Despite sales growth holding relatively steady, the contraction in profit margins remains a point of concern. The expectation is for a marginal expansion of 13 basis points in profit margins year over year, a stark contrast to the robust 109 basis point increase in the first quarter. Industry-wise, sectors like energy, materials, and non-essential consumer goods are bracing for significant declines, partially offset by robust showings from tech giants and growth sectors like communications services and information technology.

Sales prospects for the S&P 500 seem stable, even amidst tariff pressures. Capital expenditure projections have witnessed significant variations across different companies, with industries heavily reliant on AI infrastructure experiencing notable revisions. Despite the uncertainties surrounding tariffs, overall corporate investment and expenditure plans haven’t seen drastic alterations.

Looking ahead to 2025, the outlook remains challenging for profit growth. Trump’s tariffs have served as a volatile force in the US stock market, prompting fluctuations. With Goldman Sachs maintaining its 2025 forecast of 7% EPS growth and a corresponding rise in the S&P 500 index, cautious optimism is advised. The current trading price for the S&P 500 stands at 6,173 points, with a PE based on EPS for the next 12 months at 22 times. While uncertainties abound, there is room for cautious optimism tempered with prudent risk assessment.