Analysis: How U.S. Corporate Profits Are Withstanding the Tariff Shock

In the first half of 2025, the U.S. economy faced several shocks, including the imposition of new tariffs, the expulsion of immigrants, and layoffs at the Department of Government Efficiency (DOGE). Despite this, earnings growth for U.S. listed companies remained robust at over 9%, which was a crucial factor supporting the U.S. stock market. While U.S. corporate profit growth slowed in the second quarter, S&P 500 companies maintained high earnings due to a weaker dollar, cost advantages from front-loaded imports before tariffs took effect, an accelerating cycle of artificial intelligence (AI) investment, and slowing growth in labor costs. Looking ahead, factors such as ongoing dollar weakness, the AI investment cycle, increased capital expenditure deductions per the Bigger and More Beautiful Act, and moderating labor costs are anticipated to further bolster earnings for U.S. listed corporations. [para. 1]

After-tax profits for U.S. nonfinancial corporations grew at 2.0% year-over-year in the second quarter of 2025, slowing from 5.2% in 2024. This deceleration was mainly due to softer economic growth, higher tariffs, and rising interest expenses, offset by declining labor costs. According to the National Income and Product Accounts (NIPA), 2024 pretax profits for U.S. nonfinancial firms were $2.69 trillion (up 6.1% year-over-year), with after-tax profits at $2.14 trillion (up 5.2%). The drag from economic slowdown, increased production and import taxes (+14% year-over-year in Q2), and rising interest costs reduced profit growth, while lower labor expenses provided key support. [para. 2][para. 3][para. 4]

Gross margins for U.S. corporations remained near historic highs, with the corporate gross margin at 13.9% in the second quarter (down slightly from 14.3% in 2024), well above historical averages. S&P 500 companies' gross margin rose from 33.7% in 2024 to 34.6% in Q2 2025. By sector, communication services and IT led net income growth, while energy lagged due to falling oil prices. S&P 500 earnings outpaced broader NIPA profits because of exposure to overseas markets and the beneficial effect of a weak dollar, as well as the larger and more profitable nature of listed firms compared to small businesses. [para. 5][para. 6]

Tariffs had a measurable but manageable impact, accounting for 8% of corporate profits in Q2. Tariff-related revenue totaled $267 billion (annualized), 12.2% of corporate after-tax profits, sharply higher than the 3.9% share in 2024 and above levels seen during 2018-2019 U.S.-China trade friction. However, because companies often pass 50-60% of tariff costs to consumers, the effective impact on profits may be closer to 4%. Companies have also buffered the impact through inventory management and labor cost reductions. Some sectors, especially large multinational manufacturers, faced higher profit losses due to tariffs—about 10% for affected firms, consistent with both company statements and macro data. [para. 7][para. 8][para. 9]

Despite announced further tariff increases under President Trump, several positive factors will support U.S. profit growth into 2026: an ongoing weak dollar, new fiscal measures (full expensing provisions and tax benefits via the Bigger and More Beautiful Act), and a booming AI investment cycle, with major AI companies expected to spend $340 billion (about 1% of U.S. GDP) on capital expenditures in 2025. AI contributed more to GDP growth than residential consumption in early 2025. Wage growth has continued to slow, helping to offset some effects of tariffs. [para. 10][para. 11][para. 12][para. 13][para. 14]

While the US job market cooled in 2025, there were no mass layoffs thanks to the resilience of corporate profitability and high gross margins. Expulsions of unauthorized immigrants reduced labor supply, keeping the unemployment rate steady and helping to avoid a downward economic spiral. Corporate earnings remain highly concentrated in large firms, especially the "Mag 7," which accounted for 27% of S&P 500 profits in Q2 and nearly 76% of incremental profit growth. [para. 15][para. 16]