Tariff refunds coupled with the AI boom drive US corporate profits to a five-year high.

Large U.S. corporations are experiencing an unprecedented profit expansion, with multiple positive factors working in tandem to drive a significant increase in both corporate profits and revenue.

According to LSEG data, S&P 500 companies saw their earnings per share surge 53% year-over-year in the second quarter, with revenue growing by nearly 16%. Even excluding investment gains from tech giants like Amazon and Alphabet, the overall earnings growth of the S&P 500 was the strongest since the fall of 2021. Meanwhile, the number of companies raising their full-year earnings guidance nearly 2 to 1 exceeded those lowering it, a clear reversal from a year ago.

The factors driving this profit surge are multifaceted: continued growth in artificial intelligence investment, one-off gains from tariff refunds, and resilient consumer spending supported by rising stock markets and high housing prices. Executives at several companies have stated that these favorable conditions show no signs of abating in the short term.

Tariff refunds become a major profit catalyst

Tariff refunds are one of the key variables behind the better-than-expected earnings this round. According to an estimate by Apollo Global Management in mid-August, tariff refunds are expected to contribute more than 4 percentage points to third-quarter economic growth, or an additional 0.2 percentage points to the Atlanta Fed's growth forecast of 4% to 5%.

Several companies have directly included the refund revenue in their profits, rather than passing it on to consumers through price reductions. Apparel retailer Abercrombie & Fitch expects to receive approximately $120 million in tariff refunds and has raised its full-year financial guidance accordingly. The company's CFO, Robert Ball, stated, "Our core business performed better than expected." Fitness watch maker Garmin recorded $21 million in tariff refunds in the quarter ending July, driving improved margins and prompting it to raise its full-year guidance. Garmin CEO Clifton Pemble stated that even excluding the impact of the refunds, "gross margin performance was quite strong by any historical standard."

Healthcare company McKesson, Charles River Laboratories International, and food company JM Smucker all raised their full-year forecasts, supported by refunds.

Consumer spending remains resilient overall, but the divergence is widening.

Retailers generally reported strong quarterly sales figures, with consumer spending remaining active on categories such as home appliances, toys, and clothing, although rising fuel prices and long-term inflation continued to put pressure on prices.

Dollar General reported its fifth consecutive quarter of increased foot traffic, with comparable sales rising 3.5%. Best Buy reported that sales of computers, televisions, and AI smart glasses drove both quarterly revenue and profit growth. Target also recorded positive contributions from sales, profit, and customs refunds, with toys, food, and beauty categories performing particularly well.

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

Government data also shows some divergence: July retail sales figures were generally weak, partly because e-commerce platforms like Amazon moved their summer sales promotions from July last year to June this year. Regarding consumer confidence surveys, data from the Conference Board in August showed that consumers' concerns about the future economic outlook had increased.

The AI boom and market wealth effect provide medium-term support.

Artificial intelligence-related spending continues to rise, another important driver of this round of corporate profit expansion. Investment returns from Amazon and Alphabet have significantly boosted the overall earnings per share of the S&P 500, indicating that the enthusiasm for capital expenditure in the technology sector has not yet peaked.

Torsten Slok, chief economist at Apollo Global Management, stated, "As long as the AI hype continues, the stock market remains high, and consumer income continues to grow strongly, the consumer side will remain in good shape." He also cautioned against the risk: if the expected returns on AI investments ultimately fail to materialize, "we will face a very different situation."

Currently, tariff refunds are a one-off benefit, and their boost to corporate profits is unlikely to be sustainable. The marginal weakening of consumer confidence and the divergence in sales data among some retailers also suggest that the current profit boom is not universally balanced. Whether the market can maintain this momentum largely depends on whether AI investments can continue to realize commercial value and the subsequent evolution of consumer balance sheets.

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