The performance of companies in the S&P 500 (^GSPC) Index over the past 20 years indicates that their resilience to additional tariffs is weak, based on at least one metric. According to Bloomberg Intelligence, almost all of the margin expansion seen since 2004 has been driven by the surging tech sector. Without tech, overall profitability has barely improved.
The potential impact of proposed tariffs on the US economy and corporate earnings remains a major worry for investors this month. First-quarter earnings reports so far reveal that even companies themselves are uncertain about the potential repercussions, deepening market unease.
“The S&P 500’s capacity to withstand tariff shocks is not only overstated, but I would also argue that the tech sector’s dominance makes the index even more sensitive to tariffs,” said Paul Nolte, market strategist and senior wealth manager at Murphy & Sylvest Wealth Management.
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Although Trump’s administration is engaged in trade discussions with over 50 nations, Bloomberg Economics estimates the average US tariff rate currently hovers around 22.8% and could climb to 32.6%, depending on how the talks conclude. Such elevated tariffs are expected to heavily disrupt American companies by increasing costs and pressuring profit margins.
Limited Buffer
Given the modest growth in operating margins across most of the S&P 500 companies over the past 20 years, a significant escalation in tariffs would leave many US firms with little room to absorb higher costs and continue expanding.
Bloomberg Intelligence projects that S&P 500 companies will post an operating margin of 16.4% in 2025, but excluding the technology sector, that figure falls to 13.5%. These forecasts likely have yet to fully factor in the possible effects of a new trade environment. The tech sector alone is expected to deliver a margin of 34.1% this year.
“There’s a clear reason why mega-cap tech stocks led the market rally in 2023 and 2024 — they were producing enormous profits while most other sectors struggled,” said Matt Maley, chief strategist at Miller Tabak + Co.
Maley also points to growing caution as overall earnings expectations are scaled back. According to Bloomberg Intelligence data, analysts now predict a 7.9% profit increase for the S&P 500 in 2025, down from earlier forecasts of nearly 13% growth at the start of the year.
“If the one sector that was still fueling gains starts to lose momentum, it could take many investors by surprise, even after the sharp selloff triggered by Trump’s new tariffs on April 2,” Maley added.
The recent developments serve as a wake-up call for investors who have benefited from the impressive rally in US equities over the past few years, largely fueled by technology giants. Given their heavy weighting in the market-cap weighted S&P 500, tech companies now exert enormous influence over the index’s performance.
However, technology stocks remain vulnerable to sharp declines due to their still-elevated valuations, posing a risk of pulling down the broader index along with them.
“Tariffs are set to impair the benchmark’s primary driver of earnings growth,” said Michael O’Rourke, chief market strategist at JonesTrading. “Technology will likely become the biggest drag on margins within the index.”