Tariffs imposed on imported goods present a dilemma for businesses: absorb the costs and reduce profit margins, or pass them on to consumers and risk fueling inflation. While many anticipated a negative impact on corporate profits or a surge in inflation, neither materialized in the second quarter.
S&P 500 companies reported blended net profit margins of 12.8% in the second quarter, exceeding the previous quarter’s 12.7% and the year-ago figure of 12.2%. This suggests that companies largely passed tariff costs onto consumers through price increases. However, inflation data did not show a corresponding significant rise.
Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, noted the unexpected results. He attributed the discrepancy to several factors, including companies importing significantly more goods than needed in the first quarter in anticipation of the tariffs. This allowed them to sell existing inventory at pre-tariff prices during the second quarter.
The significant inventory buildup in the first quarter contributed to a reported contraction in GDP. However, Silverblatt believes this effect is temporary and that the impact of tariffs will become more evident in the coming quarters. He expects to see lower profit margins in the third quarter as companies replenish their inventories at higher prices and pass on the increased costs to consumers.
A study by the Federal Reserve Bank of Dallas supports the idea that the inflationary impact of tariffs is not immediate. The study found that the effects of tariffs on inflation tend to peak roughly a year after implementation. Federal Reserve Chairman Jerome Powell echoed this sentiment, noting that it takes time for tariff increases to fully work through supply chains.
Additional factors contributed to the delayed impact. One is the “retail inventory model of accounting,” which, according to a CNBC analysis, can lead to an overstatement of retailer profitability during periods of rising costs. While the possibility of a further delay exists, the current data does not support the likelihood of prolonged postponement of the effects of tariffs.
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