It’s early days, but there already appears to be a clear buzzword among corporate executives this earnings season: tariffs.
The word has been used at least 140 times in first-quarter sales and earnings transcripts of S&P 500 and Stoxx Europe 600 companies. Just over 15% of firms have reported so far, meaning that if the trend continues, mentions could get close to levels seen in 2018, when US President Donald Trump was previously in office.
While Trump has been clear since his November election win that sweeping tariffs are coming, he’s been vague about the details, leaving corporate executives in a tricky position when it comes to making plans for the year.
“The imposition of tariffs, which is very likely, and any reciprocity will have an impact on our business and profitability,” Vaibhav Taneja, chief financial officer of Tesla Inc., said during the company’s earnings call on Wednesday. “We’ve tried to localize our supply chain in every market, but we are still very reliant on parts from across the world for all our businesses,” he added.
Executives at hospital management firm HCA Healthcare Inc., telecommunication equipment manufacturer Ericsson AB and software giant SAP SE all said during recent earnings calls that they will need more details before being able to estimate the impact from tariffs.
“Trump’s stance on tariffs changes every day so it’s impossible at the moment to price the US trade policy in a top-down model,” said Francois Rimeu, a strategist at La Francaise Asset Management in Paris. “Personally, when looking at European equities, I just don’t price it at all in my own model because I don’t know what his trade policy will turn out to be.”
Citigroup Inc. strategists estimate that a broad 5 percentage-point hike in global tariffs from the current 2.5% level would hit S&P 500 earnings growth by a mid-single digit, though some of that would be offset by potential tax cuts. Tariffs of 10% on European goods would shave off between 1% and 2% of earnings per share, the strategists led by Beata Manthey wrote in a report published earlier this month.
In his first week in office, Trump pledged to hit Mexico and Canada with 25% levies, while applying either a lower tariff or no penalty at all on goods from China. Europe has been spared so far, but in his latest comment, Trump said he wants to impose across-the-board tariffs that are “much bigger” than 2.5%.
Executives at medical equipment maker Intuitive Surgical Inc., which relies on Mexico for some of its manufacturing, said the potential impact of tariffs could be “material,” but didn’t include any scenario in their outlook. J.B. Hunt Transport Services Inc. said most customers are taking a “wait-and-see approach” to find out how potential tariffs might influence future purchasing and business decisions, while staples retailer Costco Wholesale Corp. hinted at pulling forward inventory-buying ahead of tariffs.
Companies are “trying to get ahead of anticipated tariffs, and so we actually saw in the fourth quarter a surge in imports and inventory builds,” said Michael Green, chief investment strategist at Simplify Asset Management.
Strategists at Bank of America Corp. said in a recent research report that uncertainty could initially have a positive impact on earnings because it may spur companies to stock up on goods. They also note that companies are better prepared for tariffs this time around because they already reduced their exposure to China in 2018.
Still, there might be some uneven impact depending on sector. While many heavy-import industries have reduced exposure to China, imports have increased in areas like autos, machinery and electrical equipment, according to Bank of America.
Tariffs also aren’t the only Trump policy that’s worrying US executives. The word “immigration” has been mentioned 22 times so far on earnings and sales calls from S&P 500 companies, the biggest tally since the first quarter of 2017, when it peaked at 44 mentions. Mass deportation plans could have a devastating effect on earnings from industries as varied as service-heavy hospitality and leisure, and labor-intensive agriculture, food production, manufacturing and construction.
“Markets are still left wondering about Trump’s trade stance and geopolitics,” said Gabriele Foa, a portfolio manager at Algebris Investments. “Economic and policy uncertainty will remain elevated in the short term, necessitating higher risk premia in high-beta assets.”
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