As always, I will approach political news like this purely & strictly from a financial markets point of view. I’m not here to give you my opinions on politics.
As widely broadcasted by the current U.S. administration, broad-based 10% tariffs on China and 25% tariffs on both Canada and Mexico will be implemented Tuesday. Not surprisingly, retaliatory tariffs were announced by Canada, while Mexico and China are expected to soon do the same thing.
Futures are reacting very poorly to this news, and while I try not to pay much attention to daily price action, I did want to briefly explain my thoughts on the matter following a few questions. I think headlines related to these developments are going to be extremely frequent and incessantly noisy in the near future; tariffs overall will likely be with us in some capacity for the next four years. As such, until the dust settles and the new normal is established, volatility will likely be elevated.
This news impacts basically all companies that import/export physical goods and materials to and from these countries; all else equal, input prices will rise for industries such as automotive and consumer packaged goods (CPG). Some portion (not necessarily all) of that inflationary impact will make its way through the supply chain and into consumer goods; that could negatively impact economic growth. Firms like Bloomberg have come out saying this could impact GDP expansion by about one point and add 0.7 points to overall PCE inflation. While that’s somewhat intimidating, I think more context is needed.
The companies that I predominantly focus on will not be directly impacted by this news in terms of input costs. Not enterprise software… not financial services… not consumer-facing apps and entertainment. For these sectors, tariffs would have to lead to a material hit to consumer spending or corporate budgets and sales cycles to begin having an impact. This is always possible, especially if forecasts from Bloomberg are accurate, and would lead to downward earnings revision pressure. But? While this round of tariffs is larger and more general than during Trump’s first term, coinciding economic growth and inflation forecasts then proved far too negative; fears of impacts to earnings proved to be significantly overblown.
High-quality companies were more resilient than most wanted to give them credit for while babies (stocks) were thrown out in the bathwater and opportunities surfaced over time. Even for companies that will directly deal with rising input costs, this 0.7 point PCE estimate assumes none of them have alternatives that are cheaper than the 10% or 25% tariff. Some will. It assumes none of them have created supply chain flexibility following the first round of tariffs during this administration’s first term. Firms like Apple have been moving production out of China and to places like Vietnam and India for years. It concludes that these enterprises are all entirely helpless when overcoming these obstacles. I’ll take the other side of that bet. For sectors outside of heavy machinery (rigid, hard-to-tweak supply chains), that was not true four years ago and it is not true today.
Finally, and most importantly, I think this news will be rapidly moving and fleeting. So while I think companies do have power to adjust supply chains and counteract this hit, I don’t think they’ll end up needing to on a long-term basis. Tariffs are not a permanent fixture of the new economy. They’re a negotiating tactic from a president who loves seeing the stock market move higher under his watch. Nobody wants tariffs in place and we’ve already seen other countries like Colombia make concessions in response to other temporary penalties. We’re a positive development or concession here away from sentiment quickly turning.
Regardless of this not being a time to panic, I also do not plan to deposit more cash Monday to buy this dip just yet. We’ve had an extremely fun time in markets over the last few quarter and the S&P trades right around 23x forward earnings. We’re also only about 5% away from all-time highs. This is the perfect excuse for Mr. Market to cool off and the perfect excuse for glaringly loud noise to persist for a few days or weeks. So? I’d love to see the pullback intensify (maybe approach 10%) before I start more meaningfully buying like I did back in August (Japanese carry trade drama). This too shall pass, but whether that takes days, weeks or months remains to be determined. I think tariff news will turn out to be predominately noise… and I think this noise needs to get a bit louder for me to get aggressive here. I’ll keep you posted in real-time as always.
Companies I own where there could be direct financial impact assuming no supply chain mitigation or resolution (my base case):
Disney, Amazon, Starbucks and Lululemon all import and/or export goods among these three countries. Lululemon does about 23% of its production in China, but has plenty of demand there to minimize exports. Disney has a consumer-packaged goods business that imports toys and clothing from China. Amazon obviously has a massive import-export business. Starbucks does some coffee bean and tea importing from China. In all cases, there will likely be some form of supply chain shifting where possible, and some degree of higher input costs to temporarily absorb.
Celsius does its manufacturing in the United States, but does export to Canada where it has a small business.
Meta & Alphabet generate considerable ad demand from Chinese sellers, and this could be a demand headwind for those merchants.
Shopify’s revenue is based on volume conducted by merchants who do a lot of importing and exporting, so the impact could leak to them.
Again, I am not selling shares of these companies because of this recent news. The business cases haven’t changed, we just have a temporary macro event to get through. Worst case scenario… I’m wrong, results suffer for four quarters and we have a lot more time to accumulate. Comps in 2026 then get very easy while a future resolution adds fuel to the fire. Mr. Market climbs the proverbial wall of worry, and we just got another worry-inducing item for it to overcome. I’ll be hanging in.
