GM’s Earnings Are a Warning Sign as August Tariff Deadline Looms

A GMC Hummer electric vehicle is shown on the production line at General Motors’ Factory ZERO in Detroit, in late 2021. (Emily Elconin/Bloomberg)

General Motors has delivered a warning to corporate America, publishing second-quarter earnings that included a shocking impact from auto-industry tariffs on its bottom line.

The auto maker, which recently imported around two-thirds of the parts it uses to build the cars it assembles in the U.S., posted a collapse in profit margins for its North American business. Behind that was a $1.1 billion hit from tariffs.

Margins for the three months through June narrowed to 4.8%, the company said, a decline of nearly five percentage points from the same period last year. Core profits were down nearly one-third from last year’s second quarter and revenue dropped 2%.

The group added that it still expects tariff costs to total between $5 billion and $5 billion for the whole of the year, but said it can offset around a third of that by raising prices, cutting costs, and other adjustments.

Margin pressures were also evident in the second-quarter update from Lockheed Martin, the biggest U.S. defense contractor, although a host of company-specific challenges complicated the broader tariff impact. Haliburton, which warned of tariff impacts earlier this spring, also saw a sharp narrowing in profit margins for the second quarter.

The defense group RTX, which also reported second quarter earnings on Tuesday, trimmed its full-year profit outlook, saying the change reflected “our current assessment of the impact of tariffs” on its overall business.

While GM is unique in that it that it is affected by sectoral tariffs beyond its industry—the Trump administration has imposed levies on steel, aluminum and copper—the auto maker nonetheless highlights the pressures U.S. companies are likely to face over the coming quarters. The glimpse it offers of the challenges of operating complicated international supply chains is a warning sign for a market that continues to hit records regardless of tariffs.

Bank of America data suggests that around a net $1.8 billion flowed into U.S. equity funds last week, following three weeks of selling, while the two-week total for cash seeking exposure to U.S. industrial companies was the highest since 2015.

The S&P 500 reached its tenth record closing high of the year on Monday night. It has risen more than 26% from the lows it reached in early April, before President Donald Trump unveiled, and then postponed, his so-called Liberation Day tariffs.

But that tariff risk hasn’t gone away. Trump has vowed to impose the levies on Aug. 1. That could threaten the rally as economic growth slows, inflation pressures build, and profit margins narrow.

Goldman Sachs estimates suggest the delayed tariffs will take the overall tariff rate to around 30% by 2027. Even if that burden is pared to between 18% and 22%, as the bank expects, it would still be the highest since the early 1930s.

The bank also sees real growth in U.S. gross domestic product of around 1.6% this year and next. That compares with the 2.7% average over the previous three years.

“The administration’s commitment to the use of punitive tariffs is evident and showcases trade policy’s new status quo,” said Christian Floro, market strategist at Principal Asset Management. “A prolonged period of tariff uncertainty, with potentially many exchanges between the U.S. and its trade partners is likely.”

Stock prices don’t reflect either the volatility tariffs would bring or the effect permanent levies would have on corporate profit margins. LSEG data suggest analysts see collective second-quarter profits for the S&P 500 rising 6.7% from last year to around $536.3 billion. That growth rate is forecast to rise to around 8.4% over the third quarter before slipping back to 6.8% over the final three months of the year.

Jason Pride, chief of investment strategy and research at Glenmede, thinks that while companies have worked hard to soften the blow tariffs will have on margins, what they have to say about the topic will be just as important as their bottom-line results.

“While some cost absorption is expected, corporate margin forecasts have remained relatively stable, suggesting investors are betting on successful execution of mitigation strategies and/or an ability to pass on costs to consumers,” he said. “But tariff-related pressures may take longer to surface and could weigh on sectors with limited pricing power or heavier import exposure.”

Louis Navellier of Navellier Calculated Investing, however, thinks the fact that markets have powered to a series of record highs despite the lingering tariff risks is more likely “a bit of capitulation by the bears” than a sign of market complacency.

“With earnings strong and new highs being hit almost daily, not only is short covering in motion, but the huge amount of cash still on the sidelines has growing FOMO (Fear of Missing Out),” he said.

“It can be argued that we have yet to see the full impact of tariffs, as most have yet to be finalized, but there has been a global 10% in place since April, and stocks have gone straight up since,” he added.

Write to Martin Baccardax at martin.baccardax@barrons.com