Barclays sees tariff headwinds weighing on consumer and cyclical earnings in 2H25

Barclays has highlighted concerns about tariff-related challenges impacting consumer and cyclical industries in the second half of 2025 (2H25), as outlined in a recent analysis published on August 22, 2025. These tariff headwinds, primarily driven by U.S. trade policies under President Donald Trump, are expected to create inflationary pressures and weigh on corporate earnings in vulnerable sectors. Below is a detailed breakdown based on available information.

Key Points from Barclays’ Analysis

1. Tariff Impact on Earnings:

• Barclays notes that new U.S. tariffs, announced by the Commerce Department, impose a 50% duty on steel and aluminum content in over 400 products, including wind turbines, appliances, and packaging materials, with additional country-specific rates. These tariffs, effective immediately, are expected to increase costs for consumer and cyclical sectors, squeezing profit margins.
• The bank compared year-to-date revisions to 2H25 earnings against a 10-year historical baseline, identifying weaker-than-average revisions in sectors like Consumer Durables, Chemicals, Food, and Managed Care. These industries are particularly exposed to tariff-driven cost increases and declining demand.

1. Sector-Specific Vulnerabilities:

• Consumer Discretionary: Barclays downgraded this sector to “negative” from “neutral” due to deteriorating consumer sentiment, lower growth, and higher inflation. Excluding Amazon, consumer discretionary faces pressure from falling demand and sticky costs.
• Industrials: Also downgraded to “negative,” industrials are expected to face trade policy pressures, with companies like Illinois Tool Works and Fortive cited for slow recovery in short-cycle demand and limited growth potential.
• Consumer Staples, Health Care, and Materials: These sectors are likely to see cost growth outpace revenue, further strained by tariffs. Managed Care, in particular, is experiencing “exceptionally negative” revisions compared to healthier peers like Pharma.

1. Macroeconomic Context:

• The tariffs, part of Trump’s April 2025 policy, have triggered global market volatility, with retaliatory measures from China and threats from the EU. Barclays expects core U.S. inflation to rise above 3% in 2H25, potentially delaying Federal Reserve rate cuts until December.
• A mild U.S. recession is assumed in Barclays’ base case, alongside a parallel euro area contraction, with zero EPS growth projected for European companies and downside risks for cyclical sectors.

1. Bright Spots:

• Data center and AI-related industries, such as Electronics and Electrical Equipment, are seeing better-than-average earnings revisions, benefiting from technological tailwinds.
• Financials, including Banks and Capital Markets, are experiencing positive momentum, leading Barclays to maintain a “Positive” sector view.

Broader Implications

• Cost Pressures: Barclays warns that 2Q25 U.S. earnings, particularly outside Big Tech, face margin risks due to tariffs, sticky input costs, and weakening pricing power. Operating leverage for the S&P 500 (excluding Big Tech) is expected to turn negative in 2Q25, reversing recent gains.
• Global Trade Dynamics: The tariffs, initially paused for 90 days in April 2025, have resumed, impacting global supply chains. Small businesses face supply-chain chaos, and corporate investment has stalled, with the Trade Policy Uncertainty Index at historic highs.
• Investor Sentiment: Barclays cautions that valuations and earnings expectations remain elevated, suggesting limited upside unless trade tensions ease. Short-lived market bounces are possible, but significant downside risks persist if tariffs escalate.

Supporting Perspectives

• X posts reflect mixed sentiment. @TotemMacro suggests tariffs are hitting companies via margin squeezes rather than consumers, as income and credit are constrained. @DougKass notes that companies sold non-tariff-impacted inventory in 2Q25, but the “brunt” of tariff effects will hit in 2H25, aligning with Barclays’ outlook.
• Conversely, @SecScottBessent claims no demonstrable negative tariff impact on consumers, citing steady July inflation at 2.7%. This view is contested by @Shadywmn, who cites Yale Budget Lab projections of tariffs costing U.S. households ~$3,800/year and reducing GDP by nearly 1%. These claims remain inconclusive without further data.

Critical Analysis

While Barclays’ analysis is grounded in data-driven revisions and sector comparisons, it assumes a continuation of current trade policies, which carry uncertainty. The bank’s focus on cyclical sectors aligns with observed tariff impacts (e.g., steel and aluminum cost hikes), but the broader economic impact depends on whether Trump reverses course or other nations retaliate further. The lack of immediate consumer impact noted in some X posts suggests companies may initially absorb costs, delaying price pass-throughs, which could amplify 2H25 earnings pressure as Barclays predicts.

Conclusion

Barclays’ outlook underscores tariff-driven headwinds as a significant challenge for consumer and cyclical sectors in 2H25, with cost pressures and potential recessions threatening earnings. While AI and financial sectors show resilience, industries like consumer discretionary and industrials face heightened risks. Businesses and investors should monitor trade policy developments and earnings reports closely, as the full impact of tariffs may unfold gradually. For further details, refer to Barclays’ reports on investing.com or reuters.com.