Teresa Rivas

Stocks have been tumbling in response to tariffs. Profits could be next.

Wednesday brought a 90-day pause, but that only kicks the can down the road. Unless negotiations yield permanent agreements, potential levies will loom over corporate bottom lines.

"As tariffs are implemented, they will have negative consequences for corporate earnings over the coming months," writes Apollo Chief Economist Torsten Slok in a report. "Combined with uncertainty about retaliation, lower consumer sentiment, lower corporate sentiment, and the negative wealth effect of the $10 trillion decline in the stock market, we continue to worry about downside risks to markets and the economy."

With hopes that some deals may be struck with individual countries, the situation is anything but settled. Ongoing volatility and further downside risk is basically the only thing that does seem guaranteed, he notes, as well as the fact that a falling market alone won't cause the Federal Reserve to lower interest rates. The central bank will only do so in the face of rising unemployment -- though that may be on the way given DOGE cuts.

The question is how far earnings will fall. Analyst estimates have already started to edge down, with consensus calling for the S&P 500 to earn $267.59 per share in 2025 according to FactSet, down from $272.15 at the end of last year. However, it seems likely that that figure will fall further as the full impact of tariffs make themselves felt.

Last week, Bank of America warned that the hit to earnings per share could range from 5% and 35%; that wide range reflects the fact that there are many moving parts, but they're nearly all bad. Bear Traps' Larry McDonald warned that the figure could be closer to $230 when all is said and done.

Even with all the unknowns, many companies are already putting out their own profit warnings. On Wednesday, Delta Air Lines -- which had already warned of trouble last month -- pulled its full-year guidance, saying that "growth has largely stalled" amid tariff worries.

Also today Walmart warned that tariffs increased uncertainty about profit growth this quarter. It seems likely that many other companies will follow suit, further pressuring stocks.

Right now, consensus has the S&P 500 earning about $275 per share on a forward-12-months basis, putting its price-to-earnings ratio at 18 times, writes Canaccord Genuity's Martin Roberge. Assuming a 10% haircut to that number as estimates absorb the tariff shock, the forward-12-months earnings per share falls to $250, putting the index's price/earnings ratio at 16 times, with an average profit margin at 10%.

Roberge doesn't think margins will fall that far, given increased productivity, so he puts that figure at as high as 13%. But that only helps so much: "Therefore, if we assume a bottom in margins at 11% and 12%, and forward P/E multiples of 17 times and 18 times on forward [earnings per share] of $250, we find S&P 500 values at 4,250 and 4,500, just a tad below the 200-week moving average at 4,675," he writes. "These downside targets may appear too low or shocking, but there is much selling power from speculators who are still very net long U.S. equity futures at $163 billion."

Other strategists agree that holding on to the 5,000 level will be a struggle for the S&P 500, at least in the near term while tariffs dominate headlines and muddy visibility. Earlier this week, Citi argued the index would have to fall to 4,700 to account for the risk.

Even the bulls are getting less bullish. BMO Capital Markets Chief Investment Strategist Brian Belski lowered his year-end price target for the S&P 500 to 6,100 from 6,700, writing "we continue to recommend that investors ignore the noise, as hard as that may be, and stay the course because even with this most recent flare-up we continue to believe that the secular path for stocks remains higher."

That noise is likely to remain quite loud, however, until a clearer picture emerges or Republicans make progress on tax cut promises to offset the gloom.

"Fundamental investors will throw out 2025 [earnings-per-share estimates] (as we are seeing this morning companies likely to do the same), and ultimately this equity market will be priced based on 2026 [earnings-per-share estimates]" argues Raymond James' Tavis McCourt. "It will likely be several months/quarters before the market has a clear view of the 2026 landing point. Between now and then, volatility likely continues, and then we'll find out if equity market participants have been too creative or not creative enough in envisioning the ultimate economic damage."

With all twists and turns just four months into the year, sometimes 2025 feels like a bad creative-writing exercise in the writing room of a tariff-focused drama. If only we could get back to boring.

Write to Teresa Rivas at teresa.rivas@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

April 09, 2025 14:48 ET (18:48 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.