How Trump's Tax Cuts, Tariffs, 'Animal Spirits' Could Shape S&P 500 Earnings

With Donald Trump's imminent return to the White House, investors are eyeing a new era of pro-business policies, particularly around tax cuts and deregulation.

There are also looming risks — namely, trade tariffs on Chinese imports — that could put a dent in corporate earnings.

Analysts have started to revise their forecasts for S&P 500 earnings, factoring in Trump's potential policy moves.

Here's what they expect for corporate earnings in the coming years and the impact of Trump's tax and tariff policies.

Tax Cuts Could Drive S&P 500 Earnings Higher

Goldman Sachs analyst David Kostin sees potential upside for S&P 500 earnings if Trump successfully slashes the corporate tax rate from the current 21% to 15%.

Kostin estimates that each 1 percentage point cut in the corporate tax rate would boost S&P 500 earnings per share by about 1%. If Trump enacts the promised tax reforms, this could significantly boost corporate profits.

Looking ahead, Kostin expects S&P 500 EPS to reach $268 in 2025, an 11% increase from current levels, and $288 in 2026, up 7%. These forecasts could be conservative if Trump's tax policies come into play, he said.

"Tax reform is an upside risk," Kostin explains.

“Deregulation and ‘animal spirits’ are other sources of upside risk to our current EPS estimates,” he adds.

Deregulation Sparks Optimism, Animal Spirits Return

Veteran Wall Street investor Ed Yardeni is even more bullish.

After Trump's election victory, Yardeni raised his 2025 and 2026 EPS estimates for the S&P 500 to $290 and $320, respectively, assuming a swift reduction in the corporate tax rate.

This improvement is driven by tax cuts, reduced regulatory costs and enhanced productivity, all of which could help corporations expand their margins even in a challenging economic environment, he said.

"We expect that the S&P 500 profit margin will rise to new record highs of 13.9% and 14.9% over the next two years thanks to Trump’s corporate tax cut, deregulation, and faster productivity growth," Yardeni says.

Yardeni's 2026 EPS estimate of $320 for the S&P 500 is well above Street expectations, suggesting that Wall Street may be underestimating the impact of Trump's policy shifts.

Yardeni also cautions that rising federal deficits and increased tariffs could create volatility in bond markets.

"The economy and stock market were charged up with ‘animal spirits' right after Trump's 2016 win, and they're back now," Yardeni observes.

The S&P 500 — as tracked by the SPDR S&P 500 ETF Trust SPY — jumped to record highs and recorded its strongest week of gains in over a year after Trump won the 2024 election.

The Downside Risk: Tariffs on China

While tax cuts and deregulation could boost profits, Trump's hardline stance on China presents a potential risk to earnings. Goldman Sachs economists estimate the new administration could impose an average 20% tariff on Chinese imports, which they believe has a 40% probability of occurring.

According to Kostin, tariffs pose a significant downside risk to his EPS forecasts.

During the 2018-2019 trade conflict, many companies were able to pass increased costs from tariffs onto consumers. There's no guarantee that U.S. firms could repeat this strategy without impacting consumer demand. Higher tariffs could weaken consumer spending, lead to retaliatory tariffs on U.S. exports and increase economic uncertainty, all of which could weigh on corporate profits.

Goldman Sachs estimates that every 5 percentage point increase in the effective U.S. tariff rate could reduce S&P 500 EPS by 1%-2%.

If Trump enacts the full 20% tariff, this could translate into a 4%-8% hit to S&P 500 earnings, offsetting gains from tax cuts and deregulation.

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Image created using artificial intelligence via Midjourney.