Investors are seeking clarity as the outlook for tariffs—and therefore the U.S. economy and markets—remains decidedly unclear. Economic data is inherently backward-looking, offering little indication of how the economy is absorbing tariff increases on imported goods. However, qualitative commentary from the 1Q25 U.S. 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 U.S. dollar. However, in the quarters ahead, lower demand and decreased trade may affect revenues, increased costs could saddle margins and pervasive uncertainty may cause businesses to cut back on investment, contributing to an economic slowdown.

First quarter earnings: Solid starting point, murky outlook

First quarter U.S. earnings are coming in strong, with consensus S&P 500 earnings per share (EPS) projected to be USD 63.17. If realized, this implies a -4.0% quarter-over-quarter (q/q) contraction and a 11.9% year-over-year (y/y) growth. Tech continues to carry index earnings growth, assisted by health care this quarter, driven by weak comparisons. Energy companies, however, are struggling due to lower oil prices, and the slowdown in China is dragging down the materials sector. Looking at the three main sources of EPS growth, revenues, margins and buybacks are 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 4Q24, not a weak 1Q25. In fact, current estimates for both 1Q25 and FY25 EPS y/y growth 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 for 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 1Q14. Additionally, over 60% of CEOs are expecting a recession in the next six months, and 76% believe the April 2 tariffs could negatively impact their businesses this year.

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

The tariff impact on 1Q earnings is more noise than signal, as consumers and businesses front-run purchases and production. This pre-tariff rush may have boosted some companies’ 1Q results, but the most significant tailwind for the index was the 3.9% decline in the U.S. dollar and the 0.8% decline in oil prices over the quarter. These dynamics may continue throughout the year as the U.S. dollar continues to trade above its long-term fair value, and supply/demand dynamics point to weaker oil prices.

Dwindling demand and reduced revenues

On the flipside, this pull-forward reduces demand ahead, which was already challenged 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 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.

More broadly, small business sales expectations over the next three months had the 8th largest 3-month drop since the National Federation of Independent Business (NFIB) survey began.

Additionally, higher tariffs, uncertainty around specific tariff rates and complex tariff implementation may lead to reduced trade. World trade volumes and the S&P 500 are highly correlated, so this could also weigh on revenue.

Alongside weaker demand, companies also expect higher costs from tariffs. The Chief Executive’s CEO survey reported 81% of CEOs expect the cost of goods, services and labor 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 inventive approaches, like “tariff engineering.”

Supply chains are a direct vulnerability, but assessing exposure is a complex task as aggregated supplier information is scarce.

CEOs' forecasts for decreased revenue, profitability, capex and hiring

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 pop in hiring intentions and planned capital outlays.

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 increased by double digits.

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 gross domestic product (GDP), and employment is perhaps the most important driver of economic expansion as it supports consumption, which is 68% of GDP. Therefore, the impact of company actions extend beyond corporate profitability to the health of the U.S. economy.

Investment implications

Just as profit implications must be assessed at a sector and company level, so should investment opportunities:

• Sectors like financials and utilities may be more insulated from tariff impacts due to less foreign revenue and supply chain exposure, along with greater exposure to services over goods. Both also stand to benefit from the U.S. administration’s plans for deregulation, though timing remains uncertain.
• On the other hand, tech 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.
• Consumer discretionary is also vulnerable to slowing consumer demand; consumer staples revenues could be more durable.
• Companies with strong balance sheets, healthy margins and pricing power are likely to be the most resilient.
• For equity allocations, this supports value over growth, and increasing international diversification. 

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