Investing.com -- Tariffs are a key downside risk to 2025 earnings forecast for S&P 500 companies, according to Goldman Sachs’ Chief US equity strategist David J. Kostin.
While aggregate earnings per share (EPS) for the S&P 500 grew by 12% year-over-year in the fourth quarter of 2024, surpassing consensus expectations of 8% growth, there are concerns that new tariffs could negatively impact future earnings.
Goldman strategists led by Kostin project a 10 percentage point (pp) increase in tariffs on Chinese imports, on top of an already implemented 10 pp hike. Additionally, they expect a 10 pp increase on global critical imports and a 25 pp rise on European Union (EU) autos.
“These new tariffs would raise the effective tariff rate by 4.7 pp,” Kostin said in a note.
He estimates that every 5 pp increase in the US tariff rate could reduce S&P 500 EPS by approximately 1-2%.
Kostin cautions that a sharper tightening in financial conditions or heightened policy uncertainty could lead to a larger earnings impact. While tariffs can pressure corporate profit margins if companies absorb higher costs, commentary from Goldman’s recent report suggests many firms plan to pass these costs on to consumers.
“Although consumers were largely forced to absorb higher prices during the 2021 inflation spike, it is unclear how willing consumers will be to accept higher prices this time around,” Kostin wrote.
“Heightened policy uncertainty represents downside risk to valuation because it raises the equity risk premium and implies downward pressure on fair value.”
Despite these near-term risks, Goldman Sachs (NYSE:GS) maintains a positive outlook for the S&P 500, projecting a 7% increase to a year-end price target of 6500.
The firm’s thematic views for 2025 include a narrowing earnings growth gap between the so-called ’Magnificent 7’—the top seven performers in the index—and the rest of the companies, continued corporate investments bolstering US exceptionalism, and progression in the AI trade from infrastructure to enabled-revenues.
The ’Magnificent 7’ group has been driving sales and earnings growth for the S&P 500 in recent years. However, the level of positive surprises has lessened, and there has been a broader participation in earnings growth from the other 493 companies in the index.