In this video, Vanessa Welch, Empower vice president for financial insights, and Marta Norton, Empower chief investment strategist, discuss how tariffs could affect earnings into the second quarter of 2025. Here is a transcript:

Vanessa Welch: Marta, as we head into the second quarter, you and your team just released your Q2 2025 outlook. We know tariffs are a big focus of this outlook — and something that markets and consumers have really been wrestling with lately. So I'm curious, how are you and your teams thinking about tariffs right now?

Marta Norton: Well, as we cast our eyes back to the start of 2025, when tariffs first entered the public conversation, the real focus of markets was to look through them as negotiating tools. But if you read President Trump's day one executive order on trade — if you reflect on his comments on the campaign trail or many of his comments since — he's bringing up three objectives:

The idea of bringing back U.S. manufacturing. The idea of creating another revenue stream for the federal government. The idea of addressing trade imbalances. And when you think of those three objectives, you could argue that would mean tariffs are broader-based and longer-lasting.

Welch: Marta, it really has been fascinating to watch how quickly market sentiment has shifted. I think just a short time ago, a lot of investors were shrugging off the tariff talk, and now it seems that's changing. So do you think that's what's behind the recent market volatility? Is that why we're seeing these sell-offs?

Norton: Well, if you look at tariffs, I think it's an easy analysis to say that they're causing some uncertainty for the consumer. They're causing some uncertainty for businesses. That translates to the markets, though I would say there's AI developments, considerations around China developing AI, that has also been some measure of volatility this year.

But let's look at how severe and steep the sell-off is. Certainly, it's been sudden relative to historical standards. But if we're looking at today's sell-off and comparing it to the gains that we saw in 2023 and 2024, it's really not that much of a meaningful step backward.

Welch: I would love for you to walk us through your approach — how you and your team analyze these tariffs — because I know that you put a lot of time into this, and it was really comprehensive.

Norton: Well, our emphasis was really looking at the impact of tariffs on earnings. So what we wanted to understand was how tariffs would affect the cost side of the equation sector by sector. Every sector has a different cost breakdown. And we also wanted to look at the revenue exposure geographically to get a sense for what the impact would be from potential retaliatory tariffs. So as we take all that into account, we can get a sense for the tariff impact on cost, the tariff impact on revenue, and then ultimately the impact on margins.

Welch: That's a deep dive, Marta. I'm envisioning a lot of late nights, a lot of spreadsheets, a lot of coffee. When you put all of these pieces together, what did you and your team discover?

Norton: Well, it was exhausting, but it was also super interesting. So there are some sectors, like utilities, that you can argue are a bit more domestically oriented and so really don't face a meaningful tariff threat. But there are others — like materials, consumer discretionary, technology — where there is a margin impact, whether you're looking at it from a cost perspective, or a revenue perspective, or in some cases both.

Welch: That makes sense. I'm hearing similar concerns from friends who own businesses in these vulnerable sectors. But, Marta, I'm curious: Do you think the current market price reflects this exposure?

Norton: It's a simple question, but it's a super complex answer. Because yes, you need to know the tariff impact in these different sectors, but you also have to have a sense for where their valuations are — and also how analyst earnings have adjusted based on the idea of tariff threats. If we're seeing valuations come down — if we're seeing earnings estimates come down — then arguably we're seeing some sort of incorporation of the tariff threat. But if not, then there could be some underappreciated risk there.

Welch: I'm a super visual learner, so I want you to walk me through an example.

Norton: Sure. OK, so take materials. If we're looking at materials, we consider the sector generally overpriced. In fact, according to our historical study — and that's what we're showing here — it trades in roughly the ninth decile of its own history, so on the more expensive end. But when we're looking at analyst earnings expectations — if we're looking at December 2024 into March — we see that they've come down meaningfully. And that would make some sense given that there is a tariff threat here, as we're indicating.

So potentially, you could say maybe the market is appreciating some of the risk there. But let's look at an area like IT. Also expensive, according to our estimate — again, in the ninth decile even after the sell-off. And yet, we're not seeing much movement on the earnings expectations front — even though, according to our analysis, on the revenue cost side, there is some exposure.

And so we could argue that there's some underappreciated tariff risk in technology. On the whole, what we're seeing — sector by sector — is generally a pricey market with varied responses on the earnings front and some hot areas from a tariff impact perspective, which could mean that we could see volatility.

Welch: Interesting. That graphic really brings it all together for us. If I'm understanding this correctly, Marta, it seems like we're potentially looking at continued volatility as the market adjusts to these realities.

Norton: Well, I'm going to give this caveat. What we've looked at is what the Trump administration has proposed on a country basis when we're looking at tariffs. Now, that's one outcome. There are many different outcomes that are out there. But we would say, yes — if we're looking at this particular scenario, it's not clear to us that the market has captured the impact, which could lead to volatility.

Welch: So interesting. Great perspective. This is a topic everybody's talking about. I think if you're at a dinner party or at a cocktail party — even the grocery store — people are talking about tariffs. So thank you for this really, really deep analysis and great perspective. If you want to dig deeper into Marta's research, you can find links on Empower’s social media.

You can also visit Empower's investment perspectives page that's at Empower.com. You'll find Marta's team's overarching views on the economy, stocks, bonds, and more. Marta, thank you so much for your time. And before we go, just one reminder because you always tell all of us investors this: We've got to understand the current climate — that's really important — but keeping focused on those long-term goals is what really matters here.

Norton: That's right.

Welch: Thanks, Marta, and thanks to all of you for tuning in. We hope this was helpful for you.