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Corporate earnings hang in the balance as trade wars continue

Ongoing tariffs could create short-term struggles but long-term benefits

May 15, 20253 min read

KEY POINTS

  • Volatile market reactions: The stock market has been highly reactive to the Trump administration's economic policies, with mixed corporate earnings reports.
  • Impact of tariffs: Companies face narrower margins and slower growth due to increased production and distribution costs, with varied strategies to handle these challenges.
  • Consumer spending: Rising prices negatively affect consumer sentiment, which could lead to lower demand if price increases continue without wage growth.

The last month has taken investors on a roller coaster ride, as a volatile stock market reacted to the Trump administration’s controversial economic policies. Earnings reports from America’s largest companies have been mixed, with some sectors, including technology, beating expectations while others, such as consumer goods, lowered guidance based on anticipated impacts of tariffs.

Meanwhile, investors, companies, consumers, and policymakers are eager to understand the near-term implications of tariffs and how the trade wars may reshape the U.S. economy going forward.

“Generally speaking, expectations for corporate performance are going to be lower for a while, especially among companies that manufacture goods and depend on international supply chains,” said Steve Wyett, chief investment strategist for BOKF Financial®. “They’re going to be looking at narrower margins and slower growth because their products are now more expensive to make and distribute.”

Uncertainty is high for everyone, Wyett explained, in part because of the haphazard way tariffs have been threatened, postponed, imposed and increased. As for how they will continue to impact corporate earnings, much will depend on how companies choose to respond.

“Looking at the earnings announcements of a broad swath of industrial companies, you get a mixed bag of how they’re planning to handle tariffs,” said Brandon Barnes, senior equity portfolio manager at Cavanal Hill Investment Management, Inc. “Some say they’re going to absorb the cost increases and their earnings may suffer, while others say they’ll have to pass on price increases to customers and risk a potential decline in sales.”

Consumers play a key role
One important bellwether for earnings performance through the rest of the year will be consumer spending, as their willingness to accept repeated price increases wears thin.

“Rising prices have already impacted consumer sentiment in a highly negative way,” said Wyett. “They’re paying more and getting less, without commensurate wage increases, so further price increases from tariffs may be the straw that breaks the camel’s back.”

“It’s a question of when this starts to create demand destruction,” said Barnes. He noted that while many families have already made cutbacks, the U.S. economy has continued to grow based on the spending of a small percentage of high-end consumers. “That group tends to spend less when equities are down. So, the president and the Federal Reserve will be focused on preventing that.”

Policy decisions to watch
The actions of the White House and Congress over the next few months will carry tremendous weight, as the administration seeks to validate its aggressive trade tactics while avoiding a recession at home.

“A positive scenario would be that we start to see trade deals with other countries and tariffs may be reduced,” said Wyett. “But President Trump is still counting on tariffs as a significant source of revenue. We’re not going back to the pre-tariff environment.”

Rather than repeal tariffs, he said, the administration is likely considering ways to offset price increases with other consumer-friendly policies, such as potentially extending the Tax Cuts and Jobs Act and eliminating taxes on tips and overtime pay.

“We’re seeing a fundamental reshaping of trade and geopolitics for the foreseeable future,” said Barnes. “There could be some tremendous benefits but there’s also still a lot of uncertainty.”

No pain, no gain?
While corporate earnings may be thinner this year, Wyett said he is generally optimistic about the long-term economic outlook as America works toward a “more sustainable business model.”

“It may mean a little more inflation, lower margins, and higher interest rates, but it could ultimately create better growth prospects and less risk for the economy,” he said.

“In some ways, America is like an out-of-shape person who needs to get back in the gym. Adopting healthier habits might be difficult and painful at first, but it’s the only way to achieve longer-term health and resilience.”
- Steve Wyett, chief investment strategist for BOKF Financial

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