Tariff Refunds and AI Boom Drive US Corporate Profits to Five-Year High

S&P 500 companies' second-quarter earnings per share surged 53% year-over-year, as the AI boom, tariff refunds, and resilient consumer spending converged. Companies raising full-year profit guidance outnumbered those lowering it by nearly 2 to 1. However, refunds are one-time gains, and signs of consumer divergence are emerging. Whether this rare earnings feast can continue hinges on AI returns and consumer wallets.

Large US companies are experiencing a rare earnings expansion, with multiple tailwinds driving sharp increases in both profits and revenue.

According to LSEG data, S&P 500 companies' second-quarter earnings per share soared 53% year-over-year, with revenue up nearly 16%. Even excluding investment gains from tech giants like Amazon and Alphabet, overall S&P 500 earnings growth was the strongest since autumn 2021. Meanwhile, the number of companies raising full-year profit guidance outnumbered those lowering it by nearly 2 to 1, a marked reversal from a year ago.

Drivers of this earnings boom span multiple layers: sustained AI investment, one-time tariff refunds, and resilient consumer spending supported by rising stock markets and high home prices. Many corporate executives indicated that these favorable conditions show no signs of fading in the near term.

Tariff Refunds Become Key Profit Catalyst

Tariff refunds are a key variable behind the earnings beats. According to Apollo Global Management's mid-August estimate, tariff refunds are expected to contribute more than 4 percentage points to third-quarter economic growth, potentially adding about 0.2 percentage points to the Atlanta Fed's 4% to 5% growth forecast.

Many companies have booked refunds directly into profits rather than passing them on to consumers through lower prices. Apparel retailer Abercrombie & Fitch expects to receive about $120 million in tariff refunds and has raised its full-year financial outlook accordingly. CFO Robert Ball said, "Core business performance exceeded expectations." Fitness watch maker Garmin recorded $21 million in tariff refunds in the quarter ended July, boosting margins and prompting a full-year guidance raise. CEO Clifton Pemble said that even excluding refunds, "gross margin performance is quite impressive by any historical standard."

Healthcare companies McKesson, Charles River Laboratories International, and food company J.M. Smucker all raised full-year expectations with refund support.

Consumer Spending Resilient Overall, but Divergence Widens

Retailers generally reported strong quarterly sales, with consumer spending active in categories like appliances, toys, and apparel, despite pressures from higher fuel prices and persistent inflation.

Dollar General posted its fifth consecutive quarter of traffic growth, with comparable sales up 3.5%. Best Buy reported that sales of computers, TVs, and AI smart glasses drove quarterly revenue and profit higher. Target also saw positive contributions from sales, profit, and tariff refunds, with strength in toys, food, and beauty categories.

However, signs of consumer divergence are worth noting. Gap's latest quarterly sales declined, with Old Navy and Athleta brands dragging overall performance. Walmart's same-store sales growth slowed to its lowest in over six years, and CFO John David Rainey said on the earnings call that the current "consumer environment is arguably weaker than in February," but consumers are still spending. Dollar General CEO Todd Vasos noted that "the core customer's financial situation remains under pressure."

Government data also showed some divergence: July retail sales were soft overall, partly because e-commerce players like Amazon moved summer promotions from July last year to June this year. In consumer confidence surveys, the Conference Board's August data showed rising concerns about the future economic outlook.

AI Boom and Market Wealth Effect Provide Medium-Term Support

Sustained AI-related spending is another key driver of the corporate earnings expansion. Investment gains from Amazon and Alphabet significantly boosted overall S&P 500 earnings per share, and tech sector capital expenditure enthusiasm remains unabated.

Apollo Global Management chief economist Torsten Slok said, "As long as the AI boom continues, the stock market stays high, and consumer income grows strongly, the consumer side will remain in good shape." He also flagged risks: if AI investment returns ultimately fail to materialize, "we will face a very different situation."

For now, tariff refunds are one-time gains, and their boost to corporate profits is unlikely to persist. The marginal weakening of consumer confidence and divergent sales data from some retailers also suggest the current earnings boom is not broad-based. Whether the market can sustain this momentum depends largely on whether AI investments continue to deliver commercial value and how consumer balance sheets evolve.