U.S. Earnings Season Arrives Amid Tariff Jitters and Slowing Profit Growth

The second quarter earnings season is about to begin — and it's arriving at a very sensitive time for U.S. markets.

After the S&P 500 just hit a record 6,279 points on July 3, corporate America now faces a crucial test: can earnings growth keep the momentum going, or will rising costs and softening profit margins drag things down?

From 12% to 4% – A Sharp Downshift in EPS Growth

According to analysts, S&P 500 companies are expected to post just 4% year-over-year growth in earnings per share for Q2 — a sharp slowdown from the 12% increase in Q1. The primary drag? A squeeze on profit margins.

John Flood, a senior trader at Goldman Sachs, put it bluntly: even with solid economic data and a more dovish Fed, “corporate earnings will be the deciding factor” in sustaining this historic rally. That leaves investors facing what looks like a “low bar” in terms of expectations — but also a lot of uncertainty.

Tariffs Take Center Stage

The wildcard this quarter? Tariffs.

The U.S. has already raised its effective tariff rate from around 10% to 13%, and economists at Goldman and Morgan Stanley expect this could rise to 17% as newly announced policies are implemented. That’s a real cost pressure for U.S. companies — especially those heavily reliant on global supply chains.

How companies handle these new costs will be key. Do they absorb the higher tariffs, sacrificing margins? Or pass them onto consumers, risking weaker demand? Either choice could significantly affect earnings — and by extension, stock prices.

Goldman economists estimate that 70% of the tariff cost may be borne by consumers through higher prices, while Fed surveys suggest companies themselves expect only 50% to be passed on. The truth is likely somewhere in between — and it’s going to vary by sector.

Earnings Season Timeline and What to Watch

The Q2 reporting season officially kicks off on July 15 and runs through August 1, with 73% of S&P 500 companies set to report in that window.

Flood sees a decent chance that earnings will once again clear this “low bar,” offering support for the bulls. But he also points out three red flags that suggest the market isn’t as healthy under the surface as the headline numbers suggest:

Narrow market breadth — gains are concentrated in a few large-cap names.
Valuations — the S&P 500 is trading well above its 20-year historical averages.
Economic sensitivity — certain parts of the market may be overpricing growth expectations.

In other words: this earnings season isn’t just about the numbers. It’s about seeing whether corporate America is resilient enough to navigate rising costs, and whether investors are still willing to reward those that do.