Tariff refunds and the AI boom drive U.S. corporate profits to a five-year high

Large U.S. corporations are experiencing a rare wave of profit expansion, as multiple favorable factors are simultaneously taking effect, pushing both corporate profits and revenues to surge significantly.

According to LSEG data, S&P 500 constituent companies saw their second quarter earnings per share soar by 53% year-on-year, with revenues rising nearly 16%. Even excluding investment gains from tech giants such as Amazon and Alphabet, overall S&P 500 profit growth remains the strongest since fall 2021. Meanwhile, the number of companies raising their full-year earnings guidance outnumbers those lowering forecasts by a ratio of nearly 2-to-1, a significant reversal from a year ago.

The drivers behind this profit boom cover several dimensions: continued momentum in AI investment, one-off gains from tariff refunds, and resilient consumer spending buoyed by stock market gains and elevated home prices. Multiple corporate executives state that these favorable conditions show no obvious signs of abating in the short term.

Tariff refunds become an important profit catalyst

Tariff refunds are one of the key variables behind this wave of unexpectedly strong profits. According to Apollo Global Management’s mid-August estimate, tariff refunds are expected to contribute over 4 percentage points to third-quarter economic growth, potentially adding about 0.2 percentage points to the Atlanta Fed’s 4%–5% growth forecast.

Many companies have booked the refund gains directly as profit rather than passing them on to consumers via price reductions. 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 noted that the “core business outperformed expectations.” Fitness watch maker Garmin recorded $21 million in tariff refunds for the quarter ending in July, improving profit margins and simultaneously raising its full-year guidance. CEO Clifton Pemble said that even excluding the refund effect, “gross margin performance is exceptionally strong by any historical standard.”

Healthcare company McKesson, Charles River Laboratories International, and food company J.M. Smucker have all raised their full-year forecasts with the boost from refunds.

Consumer spending remains broadly resilient, but divergence intensifies

Retailers generally reported strong quarterly sales data, with consumers remaining active in categories such as home appliances, toys, and apparel, despite continued pressure from higher fuel prices and persistent inflation.

Dollar General saw shopper traffic increase for the fifth consecutive quarter, with comparable sales up 3.5%. Best Buy reported that computers, TVs, and AI smart glasses drove increases in both quarterly revenue and profits. Target also recorded positive contributions from sales, profits, and tariff refunds, with toys, food, and beauty categories showing outstanding performance.

However, signs of divergence on the consumer side are equally noteworthy. Gap’s latest quarterly sales declined, with its Old Navy and Athleta brands dragging on overall results. Walmart’s same-store sales growth slowed to its lowest in over six years. CFO John David Rainey stated on the earnings call that the current “consumer environment is arguably softer than in February,” though consumers are still spending. Dollar General CEO Todd Vasos also noted, “The core customer remains under financial pressure.”

Government data also signals some decoupling: July retail sales were generally weak, partly because e-commerce giants like Amazon moved their summer promotional events up to June this year from July last year. According to the Conference Board’s August survey, consumer concerns about the future economic outlook have increased.

AI boom and market wealth effects offer medium-term support

Continued enthusiasm for AI-related spending is another major driving force behind this round of corporate profit expansion. Investment gains from Amazon and Alphabet gave a significant boost to S&P 500 overall earnings per share, and capital expenditure momentum in the tech sector hasn’t peaked yet.

Apollo Global Management’s chief economist Torsten Slok noted, “As long as the AI boom continues, the stock market stays high, and consumer incomes keep growing strongly, the consumer side will remain in good shape.” He also flagged the risks: if AI investment returns ultimately fall short of expectations, “we will be facing a completely different scenario.”

For now, tariff refunds are a one-off benefit, and their boost to corporate profits is unlikely to be sustained. The marginal weakening of consumer confidence and diverging sales data from some retailers also indicate that the current profit boom is not entirely balanced. Whether the market can maintain this momentum largely depends on whether AI investments can continue to deliver commercial value and how consumer balance sheets evolve in the future.