S&P 500 EPS up 53%, revenue up 16% in Q2

Profit growth strongest since fall 2021, even excluding one-time Big Tech gains

Tariff refunds deliver windfall; companies raising guidance outnumber those cutting it 2-to-1

The New York Stock Exchange [Yonhap]
The New York Stock Exchange [Yonhap]

US corporate profits surged more than 50 percent in the second quarter, posting record results. The boom was driven by an AI investment wave and stronger-than-expected consumer spending, compounded by an unexpected windfall: companies recouping tariffs they had previously paid. Analysts say the widening gap between fears of an economic slowdown and actual corporate performance reflects a profit engine that has held up even against high interest rates and elevated oil prices.

The Wall Street Journal analyzed LSEG financial data and found that earnings per share for S&P 500 companies jumped 53 percent year-on-year in the second quarter. Revenue rose about 16 percent over the same period. The analysis was published Friday (local time).

Large one-time investment gains at Big Tech companies such as Amazon and Alphabet inflated the headline growth rate. Even stripping out those investment gains, however, S&P 500 net profit growth was the strongest since the fall of 2021. Revenue growth also hit its highest level in several years — a sign that broad corporate performance is improving, not just a handful of one-time outliers.

Companies themselves expect the momentum to continue for now. The number of firms raising their current-quarter earnings guidance was nearly twice the number cutting it — the reverse of last year, when more companies were lowering their outlooks than raising them.

What sets this earnings season apart is that tariff refunds — an unexpected variable — have been added on top of the existing growth engines of AI investment and consumer spending.

US companies are receiving back a portion of tariffs they paid in prior periods, simultaneously cutting costs and boosting net profit. Many firms have channeled the refunds into wider margins rather than passing savings on to consumers through lower prices, making tariff refunds a direct driver of improved profitability.

The effect has been large enough to move the needle on US economic growth, not just corporate earnings. Apollo Global Management estimated that tariff refunds would add about 0.2 percentage points to US third-quarter GDP growth — a meaningful share of the 4 to 5 percent growth rate projected by the Federal Reserve Bank of Atlanta, underpinned in part by this one-time effect.

The impact shows up clearly at the company level. Apparel retailer Abercrombie & Fitch raised its full-year earnings guidance after consumers kept buying even as discounts narrowed, and after the company received $120 million in tariff refunds. Chief Financial Officer Robert Ball said the underlying business had exceeded expectations.

Fitness device maker Garmin also saw its profit margin improve after receiving $21 million in tariff refunds in the quarter ended in July. The effect has spread across industries — from healthcare companies such as McKesson and Charles River Laboratories to food manufacturer J.M. Smucker.

[Yonhap]
[Yonhap]

The other pillar supporting corporate profits is US consumer spending, which has shown little sign of slowing. Despite high oil prices and prolonged inflation, consumers have kept spending on electronics, toys, clothing and other goods.

Dollar General, which draws heavily from lower- and middle-income shoppers, recorded its fifth consecutive quarter of store traffic growth, with same-store sales rising 3.5 percent. Best Buy also posted gains in both revenue and profit, driven by strong sales of computers, televisions and AI-enabled smart glasses. Target similarly improved its results, helped by higher sales of toys, food and beauty products as well as tariff refunds.

Signs are emerging, however, that a corporate boom does not necessarily translate into a consumer boom. US retail sales data for July came in broadly weak, and the consumer confidence index fell in August as concerns about the economic outlook grew. Low-income households in particular remain under significant financial pressure.

Dollar General CEO Todd Vasos said the company's core customers "are still financially struggling." Walmart's combined in-store and online sales growth also fell to its lowest rate in six years.

Even so, Walmart raised its full-year earnings guidance, using part of its approximately $2.9 billion in tariff refunds to cut prices. Chief Financial Officer John David Rainey acknowledged that the spending environment had "clearly softened somewhat compared to February," but said consumers were still spending.

Ultimately, the 53 percent surge in US corporate profits appears to be the product of structural tailwinds — the AI investment boom and resilient consumer spending — amplified by the one-time effect of tariff refunds. While the combination is simultaneously lifting corporate earnings and GDP growth for now, the key question is whether companies can sustain this pace of profit growth once the tariff refund effect fades.

Torsten Slok, chief economist at Apollo Global Management, said there are "few signs that the factors driving growth will weaken anytime soon," adding that consumer spending should hold up as long as AI investment, rising share prices and growth in consumer incomes continue.

Still, if AI fails to generate returns commensurate with the investment being poured into it, or if consumer spending begins to slow in earnest, both pillars supporting corporate earnings could wobble at once. The real test for US companies will come after the unexpected bonus of tariff refunds has been fully spent.


sjy@heraldcorp.com