US Profit Margins Face Key Risk From Tariffs, Goldman Strategists Say

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(Bloomberg) — US profit margins face a big test in the upcoming reporting season as investors assess the damage from President Donald Trump’s trade war, according to Goldman Sachs Group Inc. strategists.

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The team led by David Kostin said second-quarter earnings will “capture the immediate effects” of tariffs that have already increased by about 10 percentage points since the start of the year.

While most of the added costs are expected to be passed on to customers, “corporate margins will be pressured if companies are forced to swallow a larger-than-expected share,” Kostin wrote in a note dated June 27.

Early results from US companies paint a mixed picture. Shares of General Mills Inc. (GIS) fell 5% last week as the food company issued a glum forecast and warned of a tariff hit on its cost of goods sold. Nike Inc. (NKE), on the other hand, surged 15% as it said it would mitigate the impact on costs from higher duties.

US stocks have been whipsawed by the global trade war as investors feared some of the steepest levies in a century would stoke inflation and stall economic growth. After sinking as much as 19% from peak to trough by April, the S&P 500 (^GSPC) has returned to record highs on signs of resilient growth and optimism around Federal Reserve rate cuts.

While corporate earnings have proved robust so far, analysts expect a sharp slowdown in US profit growth for the second quarter. Data compiled by Bloomberg Intelligence show earnings per share are expected to rise only 2.6% for the April-June period, the smallest increase in two years.

Goldman’s Kostin said more analysts have downgraded margin estimates for companies that are heavily exposed to tariffs compared with the typical stock.

Still, the strategist expects the S&P 500 as a whole will “beat the low bar” set for the second quarter. Kostin was among a slate of forecasters who raised their S&P 500 index targets in recent months as global trade tensions eased.