Companies begin rolling out their second-quarter results next week, and Goldman Sachs research expects to see President Donald Trump's unpredictable tariff policies start to affect earnings.
President Trump first announced country by country tariffs and tariff increases in February. In April, he paused most of those for 90 days to provide time for ongoing trade negotiations. Before letters started going out this week announcing specific tariff levels for countries, Goldman Sachs estimated the effective U.S. tariff rate has increased by about 10 percentage points to 13%. Goldman Sachs economists now estimate the effective rate will eventually increase by another four percentage points, to 17%.
While companies have so far largely handled the burden of tariff expense, Goldman projects companies will eventually pass on 70% of the direct tariff costs to consumers through higher prices. But the full price effect could be a ways off. U.S. consumer prices increased less-than-expected in May, Goldman Sachs wrote in a July 3 report, while some business surveys indicated lower pass-through of tariff costs to customers.
Goldman Sachs estimates that U.S. businesses will take on 15% of the tariff cost burden, while foreign exporters take the remaining 15%.
Regional Federal Reserve Bank business surveys included in the Goldman Sachs report came to a different conclusion, expecting U.S. consumers to bear 49% of the tariff burden. The Fed surveys called for U.S. businesses to take 39% of the tariff costs, while foreign exporters share 12% of the cost burden.
In either scenario that plays out, U.S. consumers and businesses will take on most of the costs — not foreign companies or countries.
Trump Tariffs Set To Hit Q2
The bulk of the second-quarter earnings season kicks in next week, with JPMorgan, Wells Fargo Netflix and Goldman Sachs among the names due to report.
Early earnings results have offered conflicting messages on the margin outlook, David Kostin chief U.S. equity strategist at Goldman Sachs wrote in a recent report.
"Companies have so far only announced modest price increases this year, although increases have been larger among firms most exposed to tariffs," he wrote.
MarketSurge
But companies bearing the bulk of the tariff burden, will begin to reflect that in their profit margins. Analysts have revised consensus estimates on corporate margins suggest that some companies may not be able to fully offset the impacts, according to Goldman.
Some companies built up inventories before the tariffs were implemented, which could help alleviate some of the margin hit.
As a result, analysts also expect earnings-per-share growth to slow this quarter. The Wall Street consensus expects 4% EPS growth for S&P 500 companies in Q2, slowing from the 12% growth from Q1. On a sequential basis, the forecast implies margin contraction of 50 basis points to 11.6%.
Still, Goldman expects the S&P 500 to broadly beat the "low bar set for the second quarter," Kostin wrote.
Meanwhile, the demand outlook remains solid, according to Goldman Sachs. The firm forecasts U.S. nominal GDP growth of 4.5% year-over-year in 2025. Goldman also expects positive real income and spending growth for companies "across all income cohorts."
In addition, on Tuesday, both Goldman Sachs and Bank of America Global Research hoisted their year-end targets for the S&P 500.
Goldman lifted their target to 6,600 from 6,100. Bank of America targeted 6,300, up from 5,600.
"Recent inflation data and corporate surveys indicate less tariff pass-through so far than we expected," Goldman said.
Rising expectations for a Federal Reserve rate cut, as well as a resilient outlook for 2026 earnings also bode well for markets.
You can follow Harrison Miller for more stock news and updates on X/Twitter @IBD_Harrison
YOU MAY ALSO LIKE:
Join IBD Live And Learn Top Chart Reading And Trading Techniques From Pros
Learn How To Time The Market With IBD's ETF Market Strategy
IBD Digital: Unlock IBD's Premium Stock Lists, Tools And Analysis Today
How To Invest: Rules For When To Buy And Sell Stocks In Bull And Bear Markets
