Insights 
VT 
Corporate Impacts of Tariffs
Corporate America is facing the impact of new U.S. tariffs, with U.S. importers primarily absorbing the initial costs. Companies are concerned about losing market share and potential backlash should they increase prices.
Firms such as GM, Nike, and Hasbro are largely absorbing these costs, though some price rises are anticipated later this year. Inflation for certain goods is increasing, with the June Consumer Price Index rising to 2.7% year-on-year, up from 2.4% in May. Chinese suppliers have reduced prices by about 20%, contrary to the higher reductions expected.
Specific companies report tariff-related financial impacts. GM has spent $1 billion in second-quarter tariffs without broad price increases. Stellantis reported a $350 million profit hit. Hasbro forecasts a $60 million full-year tariff cost and plans price hikes and cost-cutting measures. Nike expects a $1 billion fiscal impact and intends to increase prices. RTX has experienced profit reductions due to tariffs. Walmart has adjusted some prices, balancing costs through inventory adjustments.
Smaller businesses, such as florists, face challenges in absorbing and passing on costs. The overall tariff burden has increased to 17% from 2.3% last year. Firms are tightening belts, examining potential for future productivity improvements, and adjusting strategies while evaluating market responses.
Market Volatility and Opportunities
Based on the pressure on corporate America, we believe market volatility is currently mispriced and presents an opportunity. With companies absorbing costs instead of immediately raising prices, there is significant uncertainty around future profit margins and consumer inflation. The CBOE Volatility Index (VIX) has recently hovered around 13-14, which is below its historical average of about 19, suggesting that options contracts are relatively inexpensive for hedging or speculation.
We anticipate that sectors most reliant on imported goods, such as consumer discretionary and industrials, will underperform in the near term. The earnings warnings from firms like Nike and Stellantis are early indicators of a broader trend that we expect to see in upcoming quarterly reports. Data from FactSet projects a slight compression in S&P 500 net profit margins for the third quarter, which supports using bearish derivative strategies on ETFs like XLY (Consumer Discretionary) and XLI (Industrials).
This corporate cost absorption could keep inflation figures unexpectedly muted, giving the Federal Reserve a window to cut interest rates. The most recent Consumer Price Index (CPI) report showed a year-over-year increase of 3.3%, a manageable figure that strengthens the case for monetary easing if it holds steady. The CME FedWatch Tool is currently pricing in a greater than 60% chance of a rate cut by September, a probability that will increase if companies continue to delay price hikes.
We can look to the 2018-2019 trade conflict for a historical parallel, where affected firms first experienced margin compression before eventually passing costs on to consumers. During that period, stocks in targeted sectors initially lagged the S&P 500 before catching up once price increases were implemented. This precedent suggests positioning for short-term weakness in specific company stocks while anticipating a later inflationary turn.
