As economists continue to debate the impact of President Donald Trump’s tariff policy on the American economy, the ongoing second-quarter (Q2) corporate reporting season may offer concrete clues. This period, which kicked-off in mid-July, offers investors an opportunity to gauge the impact of the current economic headwinds and what they mean for the future market landscape.

A keenly watched indicator of corporate performance in the last quarter is the growth rate of S&P 500 earnings per share (EPS). According to a Wall Street Horizon Q2 preview, analysts project EPS growth to come in at 4.8% for Q2, which would mark the slowest growth rate since Q4 2023. However, analysts also contend that this growth rate signals resilient performance despite persistent macroeconomic challenges.

However, investors can also draw comfort from the historical trend: 75% to 77% of S&P 500 companies have consistently beaten EPS estimates, and Q2 is likely to follow suit. Already, major U.S. banks, including JPMorgan Chase, Citigroup, and Bank of America, have reported Q2 2025 financial results that surpassed analysts’ EPS expectations. For instance, JPMorgan Chase’s Q2 EPS of $4.96 notably exceeded analysts’ forecasts of $4.48. Similar outcomes were seen with Citigroup and Bank of America, where EPS growth generally outpaced predictions. A similar pattern is anticipated for most S&P 500 companies, partly due to analyst downgrades driven by trade and tariff concerns, which have lowered the “earnings bar.”

A concerning aspect emerging from the Q2 financial results is the market’s continued elevated valuations. Markets have been hovering around a forward price-to-earnings (P/E) ratio of 22 to 23 times (22-23x) — levels not seen since 2003. This elevated forward P/E could indicate strong investor optimism about future corporate earnings growth or inflation. Conversely, it might also signal potential overvaluation or a warning that future returns could be lower.

Turning to sector performance, the Wall Street Horizon Q2 preview identifies technology and communication services as the primary drivers of S&P 500 EPS growth. Technology is expected to see an 18% year-over-year growth, with communication services projected to grow by 32%. In contrast, the energy and materials sectors could see earnings shrink by approximately 19% to 25% and 12% year-over-year, respectively.

Looking ahead, the tech sector, particularly artificial intelligence (AI) stocks, is expected to remain a standout, potentially offsetting weaker performance in other areas. For investors navigating Q3, many analysts suggest a balanced portfolio combining quality growth assets like tech or AI stocks with defensive and dividend-paying stocks. Investors should also remain alert to evolving tariff and consumer spending trends.

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