Is Wall Street Still Too Bearish on the Impact of Tariffs?

“Liberation Day” feels like a long time ago. Since President Donald Trump shocked markets with sky-high new tariff rates and a hasty U-turn, the S&P 500 Index has rebounded to all-time highs, and there’s a pervasive sentiment that Wall Street is recklessly ignoring economic risks that haven’t really gone away. Earnings season may, however, provide further fuel for the rally.

Earnings estimates for the more trade-sensitive companies still haven’t rebounded from the very serious hit they took after April 2. Maybe (just maybe) we’ll start to see that happen as companies announce their quarterly results. Though tariffs are no joke for profit margins, many large companies are finding ways to mitigate the impact, and there’s no clear sign that the levies will precipitate the economic downturn that many initially feared.

Consider consumer discretionary stocks. Excluding special cases Amazon.com Inc. and Tesla Inc., sellside analysts are projecting a 6.2% contraction in S&P 500 discretionary earnings this calendar year. The outlook collapsed after Liberation Day and has remained gloomy. The speed and scope of the downward earnings revisions for the sector since early April were the worst in 20 years outside of 2020 (the start of the Covid-19 pandemic) and 2008 (the onset of the financial crisis). Even if 2025 isn’t all sunshine and roses for these companies, Wall Street may still be a bit too negative.

We can observe a similar collapse of earnings expectations across the entire S&P 500 if we carve out the so-called Magnificent 7 group of mega-capitalization growth stocks. Analysts now project modest declines this year for consumer staples, and the rebound in industrial earnings is expected to be weaker than what was estimated early in 2025. Among the non-Mag 7 cohort, it’s noteworthy that analysts soured not only on profit margins but also on revenues. The latter has room to recover even in an environment of enduring tariffs, as long as we assume that the US economy will skirt a downturn.

If analysts are so down on so many stocks, how has the index performed as well as it has? Basically, it’s the same old story of Magnificent 7 exceptionalism, with a special emphasis on a few standouts among them. America’s superstar mega-cap stocks are putting the market on their shoulders, driven by extraordinary underlying growth and optimism about artificial intelligence.

The trade war briefly hit earnings expectations for the likes of Nvidia Corp. and Amazon, but they swiftly bounced back. More than just a retailer, Amazon has a massive cloud business that’s relatively trade-proof, and Nvidia has benefitted from positive reversals in policy since the trade war first broke loose (more on that later).

Microsoft Corp., Meta Platforms Inc. and Alphabet Inc. never lost their mojo in the eyes of analysts, a reflection of business models that weren’t highly exposed to the changes that Trump introduced. Of the entire group, only Apple Inc. and Tesla have seen an enduring drop in earnings expectations after early April. For Tesla, trade is just one in a confluence of factors that includes Elon Musk’s dramatic fallout with Trump and the pending loss of EV tax credits.

Investors are also learning that some of these stocks qualify for special treatment from the Trump administration. This week, the government reversed course on restricting shipments of key AI processors to China, unlocking billions in potential revenue for Nvidia and rival Advanced Micro Devices Inc.

Whether this Magnificent 5 leadership is a blessing or a hazard is still mostly in the eye of the beholder. Certainly, the lofty expectations implicit in these companies’ valuations come with risks of their own, but they’re generally separate from the question of whether markets are appropriately pricing tariff policy. In the meantime, investors are benefitting handsomely.

Moreover, equity investors have other developments to cheer. The Republican tax and spending package, known as the One Big Beautiful Bill Act, enshrines tax benefits on domestic and international income that Morgan Stanley said could benefit companies across a range of industries, including tech and communication services. On the trade front, Bloomberg reported that President Trump had softened his tone with China to set the table for a summit with counterpart Xi Jinping.

Could the tariff story take another turn for the worse? Absolutely. Trump is still unveiling new threats, and ongoing trade investigations could push the effective rate closer to 20% before the tariff drama is over. Most major trading partners have responded cautiously so far, but an all-out trade war with the likes of the European Union could change the calculus rather quickly. Despite the perception that Trump has backtracked, the average tariff rate still stands at about 13% today, comparable to the 1940s, and it’s possible that significant economic damage is already in train with a lag.

Yet unlike small businesses, large-cap stocks have extraordinary negotiating power with their suppliers, and the dispirited forecasts in key sectors suggest that there could, optimistically speaking, be room for analysts to start revising earnings higher rather than lower this earnings season. If that happens, we may yet see some modest upside in the US market.

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