The US stock market faces its first earnings "test" under tariff impacts! Goldman Sachs warns: S&P 500 earnings growth may significantly slow down

The US stock market is facing its first earnings season test since the implementation of tariff policies.

According to news from Chasing Wind Trading Desk, Goldman Sachs' chief US equity strategist David Kostin and his team warned in a report on June 27 that, against the backdrop of rising tariff costs, US corporate profit margins will face severe challenges, and they expect the earnings growth of the S&P 500 to significantly slow down.

Goldman Sachs stated that, influenced by Trump's trade policies, the year-on-year growth of S&P 500 earnings per share in the second quarter will sharply slow from 12% in the first quarter to only 4%, primarily due to significant increases in margin pressure, with a year-on-year expansion of only 13 basis points. Bloomberg data shows that during the period from April to June, earnings per share are expected to grow by only 2.6%, which will be the smallest increase in nearly two years.

Currently, the effective tariff rate in the US has risen sharply from 3% at the beginning of the year to 13%, an increase of 10 percentage points, and Goldman Sachs economists expect it to further rise by 4 percentage points to 17%.

Although Goldman Sachs economists expect that consumers will bear about 70% of the direct costs of tariffs, recent business surveys indicate that the extent of cost pass-through may be lower than expected. Analysts emphasize that if companies are forced to "absorb" a larger share of the tariff costs, corporate profit margins will be under pressure.

Goldman Sachs maintains its forecast for S&P 500 earnings per share growth of 7% to $262 by 2025, expecting the S&P 500 to rise by 5% to 6,500 points over the next 12 months, with a year-end target of 6,100 points.

S&P 500 Earnings Growth May Slow Significantly

The second quarter earnings season will officially kick off on July 15, with 73% of S&P 500 companies set to report their results between July 11 and August 1. Major financial institutions will be the first to report, including BlackRock, Citigroup, JP Morgan, and Wells Fargo, which will release results on July 15.

Recently, some US companies have announced preliminary results, with mixed outcomes. Last week, food giant General Mills saw its stock price drop by 5% after the company issued a pessimistic earnings forecast and warned that tariffs would impact its sales costs. However, Nike saw its stock price soar by 15%, as it stated it would be able to fully mitigate the $1 billion impact of tariffs through procurement, collaboration with suppliers and retail partners, pricing, and cost reductions, although management noted that these measures would take time and are expected to have some short-term impact on margins.

Currently, analysts' consensus expectations indicate that the year-on-year growth of S&P 500 earnings per share in the second quarter will sharply slow from 12% in the first quarter and 15% in the fourth quarter to 4%. Although sales growth is expected to decline slightly from 5% to 4%, margin contraction is the main reason for the slowdown in earnings growth. Consensus expectations show that the second quarter profit margin is expected to expand by only 13 basis points year-on-year, far lower than the 109 basis points expansion in the first quarter. On a quarter-on-quarter basis, margins are expected to contract by 50 basis points from 12.1% to 11.6% From an industry perspective, cyclical industries are showing weak performance, with sectors such as energy (expected to decline by 28% year-on-year), materials (decline of 7%), and consumer discretionary (decline of 7%) expected to see the largest drop in profits. However, the strong performance of tech giants will offset some of the negative impact, with unique growth sectors like communication services (expected to grow by 28%) and information technology (expected to grow by 18%) supporting overall profit growth for the S&P 500.

Goldman Sachs economists expect that American consumers will bear 70% of the direct tariff costs, but the Federal Reserve's business survey data shows that companies expect consumers to bear only about 50% of the tariff costs.

Sales outlook remains robust, but capital spending shows divergence

Despite facing tariff pressures, the S&P 500 sales expectations and revisions still reflect a robust demand outlook. Goldman Sachs economists expect nominal GDP growth to average 4.5% in 2025 and 5.0% in 2026. The breadth of forward 12-month sales revisions has returned to positive territory, close to one standard deviation above the average level.

Goldman Sachs stated that tariffs and policy uncertainty have not significantly suppressed overall corporate investment spending plans. However, there are significant differences in expected changes in corporate capital expenditures. Industries and stocks with the largest exposure to AI development, such as utilities and information technology, have seen the largest revisions in capital spending.

Goldman Sachs noted that during the first quarter earnings season, large-scale companies generally maintained or raised their capital expenditure expectations for 2025. Micron maintained its capital expenditure plan of approximately $14 billion for fiscal year 2025 this week, with most of the spending allocated to support high-bandwidth memory to aid AI development.

2025 Outlook: Profit growth faces challenges

Trump's global tariff policy has led to significant volatility in the U.S. stock market. Although the S&P 500 index fell 19% from its peak in April, it has since returned to historical highs due to signs of economic growth resilience and optimism about Federal Reserve rate cuts.

Goldman Sachs maintains its forecast for S&P 500 earnings per share growth of 7% to $262 in 2025, consistent with bottom-up consensus expectations but higher than the median expectation among strategists of 6%. Goldman Sachs expects profit margins to expand by only 35 basis points to 11.9%, with downside risks. In contrast, bottom-up analyst consensus expects profit margins to expand by 101 basis points, driving earnings per share growth of 14% to $300.

Goldman Sachs predicts that the S&P 500 will rise by 5% to 6,500 points over the next 12 months. The current trading price of the S&P 500 is 6,173 points, with a price-to-earnings ratio of 22 times based on the expected earnings per share over the next 12 months.