Did Q2 Earnings Exceed Expectations or Get Derailed by Tariffs?

Heading into second quarter earnings season, there was a lot of concerns about how companies would perform, considering the impact of tariffs on expenses, prices, spending, and economic growth.

At the start of the Q2 earnings season a month ago, slower growth was expected, judging from the projections by analysts. FactSet had tracked the blended earnings growth rate at 4.8%, which was the lowest since December 2023. Blended earnings growth is a combination of actual earnings already reports and earnings estimates.

FactSet anticipated the actual earnings growth to be around 9.5% for the quarter, based on the fact that some three-quarters of firms would beat estimates.

So now, more than one month into earnings season, roughly 90% of companies in the S&P 500 have reported earnings, so we can get a pretty good sense of how things actually went. The verdict: much better than expected.

Earnings Grow 12% in Q2

Recent commentary and analysis from Jeff Buchbinder, chief equity strategist at LPL Financial, found that earnings results did, in fact, exceed expectations.

Buchbinder said that S&P 500 earnings are on track to be up 12% in the second quarter, which is more than twice the 4.8% consensus estimates for EPS growth that was projected. The roughly 8.4% earnings upside was higher than LPL had predicted. In addition, 81% of companies beat consensus EPS estimates, which topped the 5-year average of 78%.

It is tracking to be roughly on par with the 13% growth rate in Q1.

Further, Buchbinder said S&P 500 revenue grew 6.3%, which was more than 2% higher than expectations. The revenue beat rate was 81%, which crushed the 5-year average of 70% and is among the highest ever recorded, Buchbinder wrote in his commentary.

The communications services sector led the way with 45.3% earnings growth, while technology posted 21.2% earnings growth. Financials were next at 12.8%.

The technology sector led the way with 15% revenue growth, while healthcare saw 10.7% revenue growth and communication services posted 9.7% growth.

The high upside was likely inflated due to excessive analyst pessimism in April, said Buchbinder, as the tariff threats were anticipated to take a bigger bite.

“Despite these factors, the ability of corporate America to grow earnings at a double-digit pace in a slowing economy with so much trade uncertainty and high tariffs is impressive,” Buchbinder said.

Powered by the Magnificent 7

The Magnificent 7 stocks – Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL), Apple (NASDAQ:AAPL), Meta (NASDAQ:META), Tesla (NASDAQ:TSLA), Microsoft (NASDAQ:MSFT), and Nvidia (NASDAQ:NVDA) – averaged almost 30% earnings growth in the quarter, wrote Buchbinder. Further, these companies increased their capital expenditures (capex) guidance for the rest of this year and next year.

Specifically, Buchbinder said capex for the Mag 7 companies will jump by more than 40% in 2025 to approximately $380 billion and jump another 21% over that in 2026 to $460 billion.

“These huge investments support earnings because they are revenue for someone, and they help drive productivity gains and boost profit margins — not just for technology companies but for all of corporate America,” Buchbinder said.

He sees this Mag7 dominance continuing throughout this year, before narrowing in 2026 as the other 493 large caps play catch up.

What About Tariffs?

While tariffs certainly hit some industries harder than others, including chemicals, consumer products, machinery, retail, luxury goods, toys, and technology products, they were expected to have a bigger impact on earnings.

“So, why haven’t these hits (and the many others) shown up in margins? First, most of the tariffs have not been fully felt yet,” Buchbinder said. “In addition, some industries are largely unaffected — services businesses including banks, businesses sourcing domestically, and businesses that are not facing sectoral tariffs with supply chains in Canada and Mexico that are exempt under the USMCA trade agreement.”

The LPL chief strategist also noted that firms have taken steps to absorb the tariff impact in several ways, like by pressuring international suppliers, passing costs on to consumers, cutting costs, and deploying AI-driven productivity enhancements.

“Second quarter earnings season delivered a powerful message: corporate America remains remarkably resilient in the face of trade uncertainty and rising cost pressures,” Buchbinder said. “Despite the anticipated drag from tariffs, companies not only exceeded expectations but also raised guidance, driving upward revisions to earnings estimates for both 2025 and 2026.”

Buchbinder does point out, however, that margin pressure will remain as tariffs flow through in the coming months, although the level of impact remains to be seen as companies have figured out ways to offset the costs.

Original Post