Tariffs, AI, And A Strong Dollar Drive Key S&P 500 Q4 Earnings Trends

Earnings season is well underway, and investors are getting a glimpse at how companies have performed in the last quarter of 2024 and, more importantly, how firms are reacting to the potential policy changes in and the shifting macro landscape. The continuous stream of news relating to tariffs, AI adoption, immigration, and government spending could impact inflation, economic growth, and the strength of the U.S. dollar. While the impact of these factors is still unknown, analyzing the most recent S&P 500 earnings and management comments can provide insight into how corporate America is preparing for the uncertainty.

As of February 7, 61% of the S&P 500 had reported quarterly earnings. Overall, results are encouraging. The aggregate year-over-year earnings per share growth rate is 13.1%, exceeding the initial analysts’ consensus expectation of 8%. According to FactSet, analysts forecast a 13% growth in S&P 500 profits in 2025. The market is paying particularly close attention to profit growth given the S&P 500’s lofty valuation of 22.1 times one-year forward earnings.

Technology companies continue to lead earnings growth, although their dominance at the index level is beginning to fade. Profits for the mega-cap Magnificent 7 relative to the S&P 493 narrowed to 19% in Q4 2025, the smallest gap since Q1 2023. Bottom-up consensus estimates imply the earnings growth premium will continue to decline to 6% in 2025 and 4% in 2026, suggesting broader market profits are set to rebound. A wider distribution of earnings growth should help stock performance for the sectors that have failed to keep up with the rally in technology shares over the last two years.

Winners and Losers in the Sector Landscape

Communication services, financials, and information technology were the standout performers in Q4, benefiting from growth in digital infrastructure, a steeper yield curve, and increasing demand for artificial intelligence applications. Communication services sector quarterly blended earnings, which includes companies that have already reported and projections for companies yet to announce, grew at 29%. Profits in information technology climbed a more modest 16.2%. Financials, in particular, benefitted from rising net interest income and renewed activity in capital markets, helping blended earnings grow 51.2% in Q4 2024 compared to the same quarter in 2023.

However, some sectors were hit hard by developments in global markets. Energy companies’ profits declined by 27.5% as falling oil prices, reduced refining margins, and weaker global demand impacted bottom-line performance. Materials, insurance, and autos also lagged, while staples and industrials underperformed their long-term growth levels.

The Role of Tariffs: A Persistent Headwind

Unsurprisingly, one common theme on post-earnings management calls is the mention of tariffs. To date, 50% of S&P companies have referenced tariffs when discussing their outlook. At a macro level, tariffs remain a significant downside to corporate earnings. According to Goldman Sachs in a note to institutional investors, economists project a 5 percentage point increase in the effective U.S. tariff rate, which could reduce 2025 S&P 500 EPS by approximately 1% to 2% and lower the overall economic growth rate by one percentage point.

While tariff policy is still highly uncertain, companies are prepared to adjust if needed. “We’re planning for multiple scenarios because it’s not just the tariff that may be on Mexico or Canada or China; it’s the impact of retaliatory tariffs that would also come into play on those supply chains. So we’re looking at very tactical short-term, midterm, and long-term if necessary actions,” said Stanley Sutula, the chief financial officer of Colgate-Palmolive, during the company’s fourth-quarter earnings call.

Potential tariffs also have an impact on manufacturing capital investment plans. “With respect to possible tariffs, we are working across our supply chain logistics network and assembly plants so that we are prepared to mitigate near-term impacts. Many of these actions are no cost or low cost. What we won’t do is spend a large amount of capital without clarity,” said Mary Barra, the Chair and CEO of General Motors, during the company’s Q4 2025 earnings call.

AI Adoption: Driving Productivity Gains

Another common theme in Q4 2024 earnings season is the adoption of artificial intelligence and continued capital expenditure from the large technology hyperscalers.

The group of AI hyperscalers, which includes Microsoft, Google, Meta, and Amazon, is set to spend over $320 billion in 2025 on AI-related technologies and infrastructure, up 40% from 2024. Microsoft announced plans to spend $80 billion on data centers for AI workloads, Google expects to invest $75 billion for cloud and networking infrastructure, Meta is budgeting $60 to $65 billion to accelerate AI innovation and maintain leadership in technology, and Amazon anticipates spending $100 billion to expand AWS capacity and meet surging demand for AI services.

AI adoption is filtering into non-technology companies as well in an attempt to drive productivity and grow margins. “More than 4 million advertisers are now using at least one of our generative AI ad creative tools, up from 1 million six months ago,” said Meta chief financial officer Susan Li.

Given the volume of data stored in the financial sector and the need to regularly implement new technology, large institutions such as Citigroup are pushing forward with implementing AI into operations. “We accelerated our use of AI, arming 30,000 developers with tools to write code, and launched two AI platforms to make 143,000 colleagues more efficient. The investments we’re making to modernize our infrastructure, streamline processes and automate controls are changing how we run the bank,” said Jane Fraser, chief executive officer of Citigroup, during the bank’s Q4 2024 earnings call.

Every sector appears to be pushing forward with AI adoption. For example, retailers use AI for inventory optimization, banks use it for fraud prevention, industrial companies use it to create predictive maintenance tools, and healthcare firms deploy AI for drug discovery and diagnostics. As costs come down and availability grows, more S&P 500 firms are expected to implement AI to enhance productivity and enhance profit margins.

Impact of a Stronger U.S. Dollar

The strength of the U.S. dollar emerged as a key headwind for multinational corporations, with the trade-weighted dollar appreciating 6% during Q4. This appreciation reduced overseas revenues and pressured overall corporate earnings, especially in the technology sector, where 56% of revenue is generated outside of the U.S. Apple highlighted foreign exchange challenges in its latest earnings announcement, projecting a 2.5% revenue decline due to currency headwinds.

U.S. dollar strength is also impacting consumer products companies with globally integrated supply chains. For example, Procter & Gamble anticipates a $300 million after-tax hit to earnings for fiscal 2025 due to foreign exchange fluctuations. Multinational S&P 500 companies must adapt not only to the potential of tariffs on their global manufacturing business but also to the possibility of currency fluctuations that may follow.

Broader Economic Implications

Beyond individual sectors and the impact of tariffs, AI, and the dollar, the broader macroeconomic backdrop remains supportive. The U.S. economy expanded at a 2.3% annualized rate in Q4 2024, slower than Q3’s 3.1% but still above the 2% long-term trend. Corporate and investor sentiment is high given the outlook for deregulation, tax cuts, and productivity growth, and the latest U.S. employment report highlights a rebound in private sector labor demand.

However, concerns about the fading impact of immigration-driven labor supply growth and declining unemployment persist. In addition, inflation expectations are beginning to rise again due to the stronger-than-expected economy and the likelihood that the costs of any tariffs would be passed through to consumers.

Most of the administration’s trade, immigration, deregulation, and tax reforms are still in the development phase. Adding to the uncertainty is how other countries may react or retaliate as these policies are solidified. Until investors receive clarity on these issues, the variability around earnings projections for the balance of 2025 should remain high.

In the meantime, investors can take comfort in what they see from Q4 earnings. S&P 500 companies are meeting earnings expectations, DeepSeek is not derailing AI investment, and companies will adapt to tariffs if and when implemented.