At a sensitive moment, the US stock market's Q2 reports are here

The U.S. stock market's second-quarter earnings reports are about to begin at a time sensitive to tariffs, with the S&P 500 index facing a critical test after recently reaching a historic high of 6,279 points.

Goldman Sachs trader John Flood stated, "Despite robust economic data and a shift to a more moderate Federal Reserve policy, corporate earnings performance will play a decisive role in maintaining this historic rally."

Analysts expect the year-on-year growth in corporate earnings per share for the second quarter to slow significantly from 12% in the first quarter to 4%, with the impact of tariff costs on corporate profit margins becoming a focal point for the market.

The second-quarter reports will provide investors with important insights into how companies are responding to tariff increases, particularly whether they choose to absorb the tariff costs or pass them on to consumers, which will directly affect profit margin performance and stock price trends.

Under "low threshold" expectations, tariff impacts become the biggest variable for corporate profit margins

The U.S. stock market will officially kick off its second-quarter earnings reports on July 15, with a concentrated release period lasting until August 1, during which 73% of S&P 500 constituents will announce their results.

The S&P 500 index reached a historic high of 6,279 points during trading on July 3, but analysts have significantly lowered their expectations for second-quarter corporate earnings growth.

Consensus expectations indicate that the year-on-year growth in earnings per share for S&P 500 constituents will sharply slow from 12% in the first quarter to 4% in the second quarter, with sequential profit margin contraction being the main reason for the slowdown in corporate earnings growth.

Flood expects the S&P 500 to once again surpass this "low threshold" expectation, bringing good news for bullish investors. However, Flood pointed out three market vulnerability indicators worth close attention: the internal pricing of economic growth in U.S. stocks, the extremely narrow market breadth of the S&P 500 over the past 52 weeks, and the valuation of U.S. stock indices relative to historical distribution levels over the past 20 years. These indicators suggest that despite strong index performance, there are underlying structural concerns in the market.

The second-quarter reports will reveal specific strategies companies are employing in response to tariff pressures, which will directly impact their profitability and stock price performance.

Based on announced policies, the effective tariff rate in the U.S. has increased by about 10% to 13%. Economists at Goldman Sachs and Morgan Stanley expect the effective tariff rate to ultimately increase by another 4% to 17%.

If companies are forced to absorb tariff costs, it will pose substantial downside risks to profit margins. Goldman Sachs economists assume that U.S. consumers will bear 70% of the direct tariff costs through higher prices, while Federal Reserve survey data indicates that companies expect consumers to bear about 50% of the tariff costs.

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