Tariff-related headlines have been a key theme in markets for some time. While the headlines have created numerous bouts of market volatility, we have stayed focused on tariffs’ impact on macro fundamentals, where we have been expecting tariffs would lead to higher goods inflation and weaker demand. The most recent set of macro data did show tariff-induced price increases.

Here, we discuss what we can learn—from the macro data and corporate behavior – about tariffs’ impact so far on the economy. In sum, we have found tariff costs are showing up gradually, most evidently in the macro data, while companies are proactively managing their costs and preserving margins.

The July U.S. CPI print showed a slower-than-expected pass-through of tariffs in core goods. To us, this reflects firms’ ability to manage their inventories efficiently, as well as their widespread decision to frontload purchases, which allowed them to delay any price increases. A more direct impact of tariffs could be seen in a rise of nearly 1% year-over-year (y/y) in the CPI’s Import Price Index. Those increases were concentrated in imported consumer goods, excluding autos.

Looking ahead, our view remains that the passthrough of tariffs into core goods will continue to happen bit by bit, spurring a gradual increase in consumer prices, rather than a rapid or drastic increase.

The July U.S. PPI print also showed evidence of stronger producer price inflation. However, margins for both goods and service businesses expanded, likely reflecting businesses’ strong pricing power, allowing them to pass along higher input costs to consumers. We see that echoed in various other U.S. surveys. The soft survey data for July shows that U.S. business leaders’ forward-looking sentiment  about their firms’ input and output price expectations have shifted higher. Case in point: the July U.S. Institute for Supply Management (ISM) Services PMI, which showed that prices paid rose to 70, the highest level this year (Exhibit 1).

We continue to expect core goods inflation to pick up by the end of the year, reflecting a rise in the effective tariff rate to 18% to 20%. This feeds into our expectations of an uptick in core inflation to 3.6% by year-end, before slowing down to around 2.5% in 2026.

In the wage-sensitive service sectors, and the shelter components of core inflation, however, we continue to have firm confidence that ongoing disinflation will continue. We see these areas as the main drivers of the slowdown in overall inflation we expect next year. A key risk to this base case would be if core goods inflation were to rise more than we expect.

Companies remain well placed to manage tariff costs

In the latest round of earnings season calls, U.S. company executives stressed their ability to sustain their profit margins in the face of tariffs. Management teams referenced various tools and tariff mitigation strategies at their disposal to counteract tariff-related cost pressures, such as restructuring supply chains, negotiating with suppliers and cost-cutting in different business areas. Many company leaders also mentioned their ability to pass price rises on to consumers; as aggregate consumer health stays in good shape, executives said they had not yet seen evidence of demand destruction due to higher prices. Several also said they now anticipate that tariffs will have a less severe impact on profits than they had previously estimated.

Examples of tariff mitigation strategies can be found across sectors. In the automotive sector, a few major companies mentioned that manufacturing adjustments and targeted cost-cutting programs are helping them offset the impact of tariffs. Some executives in that sector also mentioned a shift to focusing on core products, instead of competing in high-volume segments that require overseas production to protect their margins from tariffs. In consumer sectors, company earnings calls mentioned plans to employ product pricing and commodity hedging strategies to manage costs better. In the tech space, leaders of hardware-oriented companies with considerable supply-chain reliance on China said they had incurred tariff-related costs, but they were lower than anticipated in May.

Furthermore, in recent weeks, we saw several commitments from big tech companies to invest in the U.S. This development appears to represent a step forward in tariff negotiations between companies and the U.S. government that is likely to help minimize tariffs’ impact in the future. In the industrials and materials sectors, companies that increased domestic production during 2Q 2025 reported healthy Ebitda margins, as they benefited from lower import costs.

Beyond tariffs, another positive aspect of management commentary this quarter were the free cash flow benefits corporations said they were gaining from lower cash taxes, stemming from the restoration of favorable tax treatment of domestic R&D contained in the federal budget (the One Big Beautiful Bill Act) of 2025. Telecoms and energy sector companies, for example, cited these cash benefits.

In sum, the key message from this earnings season was that tariffs have not yet begun to weigh on margins or earnings and that companies are equipped with, and expect to continue utilizing, several successful tariff mitigation strategies. It is thus no surprise that after falling sharply through the first half of the year, analysts’ consensus estimates for EPS growth for the S&P 500 in 2025 were revised up more than 1% as the earnings season gained steam. While the bar to beat earnings estimates was as low as 4% y/y EPS growth in 2Q25, reported earnings surprised notably to the upside, coming in at 11%. Profit margins were robust and surprised to the upside in aggregate, as well, reflecting companies’ ability to manoeuvre around tariffs. As they had done in the past few earnings seasons, the Magnificent 6 led the S&P in Q2 earnings growth. Other sectors announced strong earnings that beat estimates, as well, particularly financials.

Investment implications

We maintain a slightly pro-risk stance in our multi-asset portfolios. In equities, we remain constructive on underlying corporate fundamentals and companies’ ability to manage tariff costs. However, we are mindful that valuations that seem quite stretched, particularly for the S&P 500. We are being more targeted in our U.S. equity exposure, continuing to lean particularly into sectors including information technology, communication services and financials, where we expect the U.S. economy’s resilience, a rebound in capital markets activity and high demand for artificial intelligence to keep conferring benefits. Additionally, we have equity exposures in Japan, Hong Kong, the UK and the EU, where we are constructive on the 2026 fiscal package.

We also maintain a slight preference for global duration, supported by slowing labor markets and the recent dovish pivot by the Federal Reserve’s policymakers. We favor long positions in UK Gilts and Italian BTPs, which offer higher returns and more attractive yield curves than U.S. bonds. In the U.S., we have targeted our positions on the short end of the yield curve. As credit spreads have narrowed, our portfolios have shifted toward a more neutral position in credit, yet we still find attractive opportunities in U.S. high yield, supported by strong company balance sheets and a resilient U.S. economy.

In FX markets, our portfolios are underweight the Japanese yen due to slowing economic activity and the high cost of carry. We expect further weakening of the U.S. dollar against the euro, prompted by what we anticipate will be a pickup in euro area growth, alongside increased euro fiscal spending and the European Central Bank’s pause on rate cuts.

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