Don McArthur, CFA® Senior Vice President, Senior Investment Strategist and Director of Equity Research
The S&P 500 Index earnings per share (EPS) for 2025 began the year optimistically as market analysts expected steady growth driven by technological advancements and consumer confidence. At the start of the year, projections indicated an EPS growth rate of approximately 15-16%, reflecting strong corporate performance and favorable macroeconomic conditions. At Commerce Trust, we began the year expecting 9-12% EPS growth given our forecast for real gross domestic product (GDP) growth, inflation, and outlook for profit margins. Tariffs and trade policy uncertainty have forced companies to withdraw forward guidance and anticipate lower revenues and margin compression. The overall initial optimism faced significant headwinds as various external factors began re-shaping the earnings landscape.
Tariff impacts and demand fluctuations
The imposition of tariffs on key imports and exports was one of the primary challenges. Tariffs are expected to disrupt supply chains, increase costs for raw materials, and squeeze profit margins for corporations engaged in international trade. Manufacturing and consumer goods sectors are especially impacted as they are more dependent on global supply networks than other sectors.
There is also risk of an air pocket in demand if consumers pull demand forward by making purchases earlier than planned, before prices are impacted by tariffs. This behavior could create a drop in demand in the second half of 2025 as those purchases would already have been made. This may further exacerbate the situation as consumer spending typically shows signs of weakening during rising prices and economic uncertainties. For corporations, we are already sensing the pause in spending and investment that typically takes place when there is uncertainty in the economy.
Sectors to watch
The technology sector is heavily impacted by demand for semiconductors, which are essential to electronics and artificial intelligence and are facing high tariffs. First quarter earnings were strong but did not yet reflect the policy changes and tariffs announced at the end of the quarter.
For the defense sector, manufacturing costs, raw material costs, and tariffs had an impact on defense earnings as first quarter results came in. But manufacturing changes for more efficient production could lead to more positive earnings later in the year.
Dollar movement
The weakening U.S. dollar has been another influencing factor for earnings early in this year. When companies sell goods and services in other currencies, then convert the sales from foreign currency into weaker U.S. dollars, the conversion effect produces more dollars and revenue than with a stronger U.S. dollar. This provides a tailwind to revenue growth for U.S. companies that sell into international markets such as those in the technology industry.
Growth still expected
The tariff announcements, shifting value of the dollar, and fluctuations in demand create challenging dynamics in the market. Manufacturing, consumers goods, and technology are especially impacted in this environment. But there is still room for growth over 2024, and investors are likely to begin to look at 2026 EPS expectations to value the market as we progress through 2025.
Past performance is no guarantee of future results, and the opinions and other information in the commentary are as of April 30, 2025. This summary is intended to provide general information only and is reflective of the opinions of Commerce Trust. This material is not a recommendation of any particular security, is not based on any particular financial situation or need and is not intended to replace the advice of a qualified attorney, tax advisor or investment professional.
Diversification does not guarantee a profit or protect against all risk. Commerce Trust does not provide tax advice or legal advice to customers. Consult a tax specialist regarding tax implications related to any product and specific financial situation. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Commerce Trust is a division of Commerce Bank.
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