How will tariffs impact company profits?

On Saturday, President Trump announced that the United States will impose a 25% tariff on imports from Mexico and Canada, and an additional 10% tariff on imports from China. Since then, a deal has been reached with Mexico to delay tariffs by one month, although at the time of writing no such reprieve is in sight for the northern neighbor.

The original announcement would have seen tariffs go into effect on Tuesday for goods arriving from the three countries that America buys most from — a trio of nations that are collectively responsible for $1.25 trillion worth of imports last year (up to November).

That’s bad news if you spend a lot of cash on avocado on toast (about 90% of America’s avo supply comes from Mexico). It also likely means a direct impact on the profits of America’s largest companies.

Indeed, Goldman Sachs’ researchers, led by David Kostin, estimated in a new note published this morning that (emphasis ours):

“...every 5pp increase in the US tariff rate would reduce S&P 500 EPS by roughly 1-2%. As a result, if sustained, the tariffs announced this weekend would reduce our S&P 500 EPS forecasts by roughly 2-3%, not taking into account any additional impact from major financial conditions tightening or a larger-than-expected effect of policy uncertainty on corporate or consumer behavior.”

So, at face value, we’re potentially talking about profits mechanically falling 2% to 3% in aggregate, which is the simple part of the explanation as to why the SPDR S&P 500 ETF is down 1.6% in premarket trading, with automotive stocks like General Motors , Ford, and Volkswagen among the stocks getting hit the hardest. T

The harder stuff to foresee? Second-order impacts. Those could include, but are not limited to: the impact of tariffs on rising policy uncertainty, manufacturing relocation, the potential impact of retaliations, the downstream effect on inflation — and therefore interest rates — and the “release valve” effect of a stronger US dollar.

Indeed, the US Economic Policy Uncertainty Index, a measure of how much major US newspapers are referencing economic uncertainty, spiked to a reading of 502 on January 31, with the average of the last 30 days at its highest level since the pandemic.