Key Points:
Tariff Refund Fadeout: Supreme Court strikes down IEEPA tariffs in February → $100 billion in refunds flow to importers → refunds exhausted by September, leaving S&P 500 earnings facing tougher comparisons starting Q4.
The Adjusted Earnings Illusion: 35 of 45 S&P 500 companies that received tariff refunds left them inside their adjusted earnings per share, inflating the profit metric Wall Street uses to set stock prices by a combined $9.6 billion.
Holiday Margin Squeeze: If Apple's gross margin lands at the midpoint of its 45% to 46% guidance, that is a 4.6-point drop from the June quarter's reported 50.1%.
Apple's Weight Does the Damage: Apple's 7.3% S&P 500 weighting means Monday's roughly 4.6% total decline (regular session plus after-hours) translated to about 0.34 percentage points of drag on the entire index, or approximately $1,700 on a $500,000 portfolio.
Monday night Apple reported its best September quarter ever. September quarter record revenue. September quarter record earnings per share. John Ternus got to take his first bow as CEO with a beautiful set of numbers.
I can't stop thinking about one line buried in the press release.
It said earnings per share of $2.10 "included a favorable impact of $0.05 from tariff refunds." Five cents doesn't sound like much. But that was just the September quarter. The June quarter before it? Eleven cents a share from the same refunds. That adds up to sixteen cents a share across two quarters. On roughly 14.6 billion shares, the math is about $2.3 billion in profit that came from the government. Not from selling iPhones. Not from the App Store. From a refund check.
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Here's what happened. Back in February the Supreme Court ruled 6-3 that President Trump's tariffs under the emergency powers act were illegal. The government had to give the money back. Customs and Border Protection cut checks. By July 31 they had returned more than $100 billion to American companies. Apple got roughly $2.3 billion of that pile.
I don't think most people realize what that did to the numbers. In the June quarter Apple reported a gross margin of 50.1 percent. Strip out the tariff refund and it was closer to 48.1 percent. In September the reported margin was 47.9 percent. Strip out the refund and you're around 46.9. The trend line underneath the headline was falling. The refund just covered it up.
Now the refund is gone. Apple's CFO Kevan Parekh said on Monday's call that they have received "the vast majority" of the money owed. There is no more check coming. And what did Apple guide for the holiday quarter? Gross margin of 45 to 46 percent. That is nearly five full points below where it was in June. Memory chips cost more. Siri's AI rollout costs money. And the tariff cushion has vanished.
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Apple is 7.3 percent of the S&P 500. The single biggest weight in the index. If you own a target-date fund or any broad index fund in your 401(k), you own a lot of Apple. When Apple's margin drops, the earnings for the whole index feel it.
But here's what worries me. Apple wasn't the only one riding the refund. More than 40 companies in the S&P 500 booked a combined $9.6 billion in tariff refund benefits over the summer. And a study that read every single earnings release found that 35 of 45 companies left the refund inside their adjusted earnings number. That is the number Wall Street uses to value the stock. At least eight of those 35 even called the refund "one-time" or "nonrecurring" and still left it in. They counted a government check as if it were regular profit.
That means the earnings growth you saw this year across dozens of big American companies was partly a mirage. A one-time windfall dressed up in recurring clothing. Next quarter those companies have to beat this year's numbers. The numbers that had a $9.6 billion gift inside them. Nobody is getting another check.
Meanwhile the tariffs that remain are real. The Supreme Court only struck down the emergency tariffs. The original Section 301 duties on Chinese goods are still in force. A new forced-labor tariff of 10 to 12.5 percent on imports from 60 countries took effect in July. Apple "reluctantly" raised iPhone prices by $100 this year to cope. Costs are not going away. They are going up.
I get it. Apple still sold $57.6 billion worth of iPhones in a single quarter. The company is not in trouble. But the stock market doesn't pay you for what already happened. It pays you for what comes next. And what comes next is a holiday quarter where Apple's margin is guided two to three points lower. Where the refund tailwind is zero. Where memory costs keep climbing. Where China revenue missed estimates again.
Here is the one number I keep coming back to. Thirty-five of forty-five. That is how many S&P 500 companies quietly counted a one-time government check as regular profit. Your index fund priced those earnings as if they would repeat. They won't.
Nobody knows exactly when the market figures this out. Maybe it already started. Apple closed down nearly two percent Monday and dropped another 2.8 percent after hours. That alone knocks about $1,700 off a half-million-dollar index portfolio. And Apple is just the biggest name on the list.
I keep picturing a poker player who won a big pot because the dealer accidentally gave him an extra card. He played it well. But the dealer just took it back. And the other players at the table haven't noticed yet.
More on this tomorrow.
— American Ledger
