Investors in US equities are grasping at straws as the outlook for tariffs – and therefore the US economy and markets – remains decidedly unclear. Economic data is inherently backward-looking, providing little indication of how the US economy is absorbing tariff increases on imported goods, which rose from an average of 2.3% in 2024, to 12% at the end of March, to approximately 19% today. However, commentary from the first-quarter 2025 earnings season, paired with survey data, can paint a crude picture of tariff impacts. First-quarter data points to a pull-forward of spending and manufacturing, plus a tailwind to earnings from a lower dollar. But in the quarters ahead, lower demand and less trade may impair revenues, while increased costs could saddle margins and pervasive uncertainty may cause businesses to cut back on investment, contributing to an slowdown in the US economy.

First-quarter earnings: Solid starting point, murky outlook

First-quarter earnings in the US have been strong, with consensus S&P 500 earnings per share (EPS) projected to be $63.17, which would imply a 4.0% contraction quarter-over-quarter (q/q), but an 11.9% increase year-over-year (y/y). Tech continues to carry the S&P 500’s earnings growth, assisted by health care this quarter. Energy companies, by contrast, are struggling due to lower oil prices, while the slowdown in China is dragging down the materials sector. The contribution from the three main sources of EPS growth is expected to be mixed, with revenues, margins and buybacks expected to contribute 4.8, 8.2 and -1.1 percentage points, respectively, to y/y growth.

The quarterly decline is mainly due to an exceptionally strong fourth quarter of 2024 rather than a weak 1Q25. In fact, current EPS growth estimates for both the first quarter of 2025 and the 2025 financial year remain strong at 11.9% vs. the 10-year median of 4.4%, and 9.5% vs. 3.1%. Unfortunately, future estimates are based on economic assumptions that no longer hold. If the economy slides into a mild recession, profit growth is unlikely. Equity analysts are awaiting policy clarity before adjusting forecasts, so current numbers are effectively pre-tariffs. Since January, consensus estimates to 2025 EPS have been revised down by just 2.9% compared to the 10-year average of 2.7%.

Analysts may be on hold, but S&P 500 companies have issued the most downward revisions to earnings guidance since the first quarter of 2014. In addition, over 60% of CEOs are expecting a recession in the next six months, and 76% believe the 2 April tariffs announcement would negatively impact their businesses this year.

The upfront upshot: Pull-forward demand and a lower dollar

The tariff impact on first-quarter US corporate earnings is more noise than signal, as consumers and businesses front-run purchases and production. Real goods imports surged 51% (annualised) from last quarter, driven by a 232% increase in computers, a 142% increase in consumer goods and a 13% increase in autos. Similarly, retail sales grew 1.4% in March, the largest monthly increase in over two years, led by a 5.3% increase in motor vehicles and parts, as well as notable increases in building materials, sporting and hobby equipment, electronics, and appliances. These are the categories tariffs will likely hit the hardest, so higher prices, compounded by the pull-forward in spending, may drag on consumption in the coming months.

This pre-tariff rush may have boosted some companies’ first-quarter results, but the broadest tailwind for the index was the 3.9% decline in the US dollar and the 0.8% decline in oil prices over the quarter. These dynamics may persist into the rest of the year as the dollar continues to trade above its long-term fair value, while supply/demand dynamics point to weaker oil prices.

Dwindling demand and reduced revenues

On the flipside, the pull-forward that we’ve seen in spending in the first quarter will be expected to reduce demand ahead, which was already threatened by tariffs. For example, the S&P Global Mobility forecasts for 1Q25 auto production growth increased from -1.1% y/y in January to 1.3% after the tariff announcements, but full-year forecasts decreased from -0.5% to -1.7%. Higher costs could prompt US consumers to trim purchases, particularly on discretionary items. Chase credit card data shows that discretionary spending decelerated from 4.5% y/y from November to January, to 2.5% from February to March, led by airlines and lodging. Major airlines are starting to feel the pressure. According to Delta’s CEO, “…given broad economic uncertainty around global trade, growth has largely stalled. The impact has been most pronounced in domestic, and specifically in the main cabin, with softness in both consumer and corporate travel.” In response, management is reducing capacity and “aggressively managing [their] cost base” by “adjusting plans around [their] workforce and supplier base.”¹ Similarly, United Airlines is cancelling off-peak flight times after a 5% y/y decline in domestic US main-cabin revenue per seat mile.

More broadly, small business sales expectations over the next three months had the 8th biggest three-month drop since the NFIB survey began.

A few parts of the US stock market are relatively insulated. For example, utilities and consumer staples companies in industries such as groceries and personal care products should maintain stable demand even during downturns.

In addition, higher tariffs, confusion around specific tariff rates and complex tariff implementation may mean less trade. World trade volumes and the S&P 500 are highly correlated, so this could also weigh on revenue. About 41% of S&P 500 revenue comes from abroad, with technology and materials having the largest international exposure, while sectors such as financials, real estate and utilities are more domestic.

Cost cutting creativity

Alongside weaker demand, US companies also expect higher costs from tariffs. Chief Executive’s CEO survey reported 81% of US CEOs expect the cost of goods, services and labour to be higher in 2025, with half expecting double-digit increases. Companies cannot fight depressed demand, but many are planning to manage higher costs through traditional ways, such as reducing spending, and through more inventive ways.

Supply chains are a direct vulnerability, but assessing exposure is a complex task as aggregated supplier information is scarce. However, analysis of the overseas exposure of S&P 500 supply chains again points to vulnerability in tech and consumer-related sectors.

US companies are lobbying in Washington, investigating opportunities for greater USMCA (United States-Mexico-Canada Agreement) coverage, and “tariff engineering.” Tariff engineering is not new; previous examples include Converse, which imports its trainers from China, adding felt to the soles of their shoes so they could be classified as slippers, which are subject to much lower tariffs.² Ford used to import vans with passenger seats in the back and removed them upon entering the US to avoid a tariff on cargo-duty vehicles.³

In earnings calls, management teams are also discussing more conventional levers to reduce spending, including pausing business travel, cutting advertising and leaning into natural attrition. In response to an estimated $250-$350 million increase in 2025 costs from tariffs, Caterpillar has “taken a number of short-term actions…cutting back on travel, discretionary spending; [they’re] able to slow some inbound shipments…”^4,5

Passing the buck(s): Price increases

So, who absorbs the higher costs: companies via margins, or US consumers at the cash register?

The NFIB’s small business survey showed pricing plans for the next three months have begun to creep higher. Several companies have addressed this head-on in their earnings calls: The CEO of Best Buy warned, “We expect our vendors across our entire assortment will pass along some level of tariff costs to retailers, making price increases for American consumers highly likely.”⁶ Similarly, FedEx stated a lot of their commercial customers “are anticipating that they will increase prices, or already have.”⁷

Not every company can follow suit; some exhausted their pricing power during the post-pandemic inflation surge. So, consumers will bear part of the cost increases, but companies will have to absorb the rest, resulting in weaker margins. Higher prices will also hurt demand, putting further pressure on margins. Although tech companies are particularly exposed to foreign revenue and suppliers, they also tend to have ample margins compared to other industries and relative to their own history, easing the headwind. The consumer sectors, however, have less flexibility.

Protecting profitability: Scaling back on hiring and capex

If uncertainty persists, companies may need to cut back more meaningfully, not just to their operations, but to investments, such as hiring and capital expenditures. The NFIB’s small business survey in March showed a reversal in the post-election rebound in hiring intentions and planned capital outlays, echoing the regional Fed surveys’ assessment of capex intentions. In their earnings call, Dow Chemical stated it is implementing “cost reductions in areas like purchase services, contract labour and the elimination of approximately 1,500 Dow roles.” The company is also delaying a prominent net-zero project that would cut capex spending to approximately $2.5 billion versus the initial plan of $3.5 billion.⁸

These sentiments were amplified in April’s Chief Executive Survey. From March to April, the number of CEOs expecting reductions in revenue, profitability, capex and headcount jumped by double digits.

Artificial intelligence capex could remain stickier though. Tech CEOs have been recommitting to aggressive capital expenditures and strategic hiring to grow cloud, server and models businesses. In its first-quarter earnings call, Meta raised its 2025 capex guidance from $60 billion-$65 billion to $64 billion-$72 billion to reflect “additional data centre investments to support AI efforts as well as an increase in the expected cost of infrastructure hardware.” The CFO explained, “The higher cost we expect to incur for infrastructure hardware this year really comes from suppliers who source from countries around the world, and there's just a lot of uncertainty around this given the ongoing trade discussions.”⁹

While scaling back on headcount and capital expenditures may preserve profitability and bolster balance sheets, it could also accelerate the economic slowdown already underway. Business fixed investment makes up nearly 15% of GDP, and employment is perhaps the most important driver of economic expansion as it supports consumption, which is 68% of GDP. Therefore, the impacts of company actions extend beyond corporate profitability to the health of the US economy.

Investment implications for US equity investors

Just as profit implications must be assessed at a sector and company level, so should opportunities for investors in US equities.

Some sectors, such as financials and utilities, may be more insulated from tariff impacts due to less foreign revenue and supply chain exposure, plus greater exposure to services over goods. Both also stand to benefit from the Trump administration’s plans for deregulation, though timing remains uncertain.

On the other hand, the tech sector may be more vulnerable to tariff headwinds due to its revenue and supply chain exposure and could be a potential target of foreign retaliation. These headwinds could put a portion of capex at risk.

Otherwise, consumer discretionary is also vulnerable to slowing consumer demand, while consumer staples revenues could be more durable. Companies with strong balance sheets, healthy margins and pricing power are also likely to be most resilient.

For equity allocations, the outlook supports value over growth and increasing international diversification.

¹ Delta, Daniel Janki (CFO), 1Q25 earnings call transcript, 9 April 2025.

² The Smithsonian Magazine. Rose Eveleth. “This Is Why Your Converse Sneakers Have Felt on the Bottom.” 11 September 2013.

³ Tax Policy Center. Urban Institute & Brookings Institution. Robert McClelland. “Does the “Chicken Tax” encourage people to purchase larger trucks?” 31 May 2023.

⁴ FactSet consensus estimate for 2025 cost of sales is $41.0 billion.

⁵ Caterpillar, Joe Creed (COO), 1Q25 earnings call transcript, 30 April 2025.

⁶ Best Buy, Corie Barry (CEO), 1Q25 earnings call transcript, 4 March 2025.

⁷ FedEx, Brie Carere (CCO), 1Q25 earnings call transcript, 20 March 2025.

⁸ Dow, Jim Fitterling (CEO), 1Q25 earnings call transcript, 24 April 2025.

⁹ Meta, Susan Li (CFO), 1Q25 earnings call transcript, 30 April 2025.
 

The firms highlighted have been selected based on their significance and are shown for illustrative purposes only. They are not recommendations.