As the Q2 earnings season kicks off, investors are zeroing in on one pressing question: Are the tariffs imposed by the Trump administration beginning to chip away at corporate profits? The answer may soon emerge in the coming weeks as companies release their financial results.
At first glance, the broader economy hasn't shown major signs of strain. Inflation, consumer spending, and business activity data have remained relatively stable. But beneath the surface, cracks are starting to form. Many companies anticipated higher costs and stocked up on inventory earlier this year to soften the blow. Yet, this strategy is only a temporary buffer. Firms with weaker pricing power and less competitive advantage are increasingly forced to absorb these tariff-related costs, squeezing their profit margins.
Take Kevin Smith, a Florida-based owner of a mid-sized home goods company. “Almost all our curtain fabrics come from Turkey,” he explains. “With the added tariffs, our margins have been cut nearly in half.” While he used to pass some costs onto customers through price increases, fierce competition now makes that option far less viable.
Analysts currently forecast that the S&P 500’s overall earnings growth for Q2 will slow to around 5% year-over-year — a notable drop from the 13% growth reported in Q1. This marks the slowest pace since late 2023. Looking at the full year, projections anticipate about 9.4% growth in 2025, down from 11% in 2024.
This slowdown matters for investors. Dave Sekera, Chief U.S. Market Strategist at Morningstar, advises that now might be a better time to take some profits rather than adding fresh capital to the market. Still, earnings often surprise on the upside, especially when analysts lower expectations ahead of results — just as happened in Q1, when actual growth outpaced the initially predicted 6.8%.
But the tariff impact isn’t evenly spread across all industries. Cyclical sectors—those sensitive to economic shifts—are expected to take the biggest hit. According to Goldman Sachs analysts, the energy sector faces a steep 26% drop in earnings year-over-year this quarter. Consumer discretionary and basic materials sectors are expected to decline by about 5.6% and 3.7%, respectively.
Damien Conover, Morningstar’s Director of Equity Research for North America, points out that retail and apparel companies are especially vulnerable. “These sectors rely heavily on overseas manufacturing,” he says. “When tariffs hit, company valuations come under real pressure.” Emily Jensen, a procurement manager for a Chicago home goods retailer, shares how their company is rethinking production. “We’re considering moving some lines back to North America. Labor costs are higher, but the unpredictability of trade policies overseas is too risky.”
On the flip side, communication services are expected to shine, with earnings growth projected near 30%. Information technology looks strong too, forecasted to grow 16%, while healthcare and utilities anticipate more modest gains of 3.5% and 4.5%.
Experts emphasize that the tariff impact is unfolding gradually, not as a sudden shock. Larger manufacturers have stockpiled inventory, softening immediate cost pressures. Many companies plan to counter tariffs with cost-cutting, supplier negotiations, and selective price increases.
Beyond just the numbers, investors are keenly watching whether companies resume providing forward guidance. Many avoided it in Q1 amid policy uncertainty, making it hard to gauge future outlooks. This cautious stance may persist through Q2.
For example, FedEx declined to offer full-year guidance for 2026 in its recent earnings, citing rising macroeconomic uncertainty, though it did provide next-quarter projections. Sekera notes this cautious tone could linger as trade negotiations remain unsettled.
Liz Ann Sonders, Chief Investment Strategist at Schwab, stresses that in such an uncertain environment, forward-looking commentary and earnings surprises will carry extra weight. “Markets are especially sensitive to outlooks when policies on trade, tariffs, and interest rates remain in flux,” she says. Unexpected results could trigger significant market moves.
Of course, tariffs aren’t the only factor at play. Economic growth, consumer confidence, monetary policy, and tech sector trends all influence corporate fortunes. For instance, semiconductor equipment maker ASML provides an early window into AI infrastructure demand among tech giants, while Pepsi’s performance may reveal how weight-loss drugs are reshaping consumer behavior.
Ultimately, Q2 earnings season is shaping up to be a critical juncture. Investors will parse every detail—from tariff impacts and corporate strategies to economic signals and emerging trends—to steer through an increasingly complex market landscape.