If there’s a silver lining (there’s not), it’s that US corporate profits are extremely elevated by any historical standard.
Ostensibly anyway, that means there’s considerable scope for management teams to absorb the hit from the highest US tariffs in a century without an existential crisis on the bottom line, and without passing the entirety of the costs on to already-stretched US consumers.
I realize this is well-worn territory for some (most?) readers, but it really does bear repeating — and re-illustrating.
The figure shows a broad measure of corporate profitability in America. Suffice to say that in aggregate anyway (i.e., ignoring the “haves” / “have-nots” divide as it exists among corporates), the post-pandemic era was very good to bottom lines.
And yet, as the chart subheader reminds you, it’s very unlikely that the C-suite, even where they can afford it, will eat the cost of the tariffs as lost margin. That’s just not how it works in shareholder capitalism defined as it is by a “stockowners’ first, everyone else last” mentality vis-à-vis stakeholders.
So, price increases are coming to protect profits, but this whole discussion nevertheless raises one obvious question in the context of a 10-fold increase in the US tariff rate: What happened to US corporate profits during previous episodes of “big league” tariffs?
Those two charts above are from SocGen’s Manish Kabra, and they come with the caveat that I’m operating right now from a weak WiFi signal and as such don’t have the usual capacity to check the numbers for myself via data tools that use a lot of bandwidth.
I assume — I hope — I don’t need to double check the numbers, though. If they’re correct, the read-through’s pretty bad.
“The history of high tariffs shows extreme danger,” Kabra wrote Tuesday. “The 1890s McKinley Tariff led to a ~60% decline in EPS and the 1930s Smoot-Hawley Tariffs to an even larger, ~70% drop.”
“The world’s not like-for-like but you get the gist,” Kabra remarked.
Yes, indeed I do get the gist: This is a disaster waiting to happen, and it speaks to why so many people, including corporate titans across industries, are deeply concerned.
The “dire backdrop is the reason we say the current crisis of confidence has to be short-term,” Kabra wrote. “If not, the wisdom of the crowd [which flags] pervasive negativity is spot-on.”
Higher tariffs feeding into inflation requires actual importation of goods and actual assessments of higher duties on said goods. I have importing clients that fall into three different camps at the moment. First, those who have decided to carry on operations normally, but are either slowing deliveries or parking them in foreign trade zones pending further clarity on tariffs. Second, I have clients who have raced ahead, higher tariffs be damned, and their experience is either one of feeling screwed amid the subsequent delays and carve-out talk, or very happy they did because, incredibly (tho I guess not), Customs isn’t always collecting the additional tariffs due to administrative snafus and general chaos prevailing at many ports. And third, I have clients who have halted everything, and are pissed that Customs isn’t collecting the additional tariffs against competitors who forged ahead.
Guess we need to update our tariff models to include an exogenous variable for opacity and incompetence.
I’m about to build out another store and was just told by shelving/refrigeration vendor that if I can get the order in his pipeline in the next week to two then his company and the fabricators will eat any tariff. After that it’s an additional 10% on my ~$100k order.
Tracking 1Q2025 earnings.
So far 22% of S&P 500 by count (23% by cap) have reported, 61% (65%) beat cons rev, 77% (73%) beat cons EPS, 42% (53%) saw next quarter cons rev go up, 28% (29%) saw next qtr cons EPS go up, and average reaction on report was +0.7% (+0.5%). Based on next qtr cons change, best sectors so far Comm Srvcs (no Mega so far, just telcos etc), Healthcare, Real Estate (RE sample = 1), worst sectors Energy, Financials, Industrials. Discretionary and Staples were midpack for revenues but among worst for EPS.
Broadly makes sense.