Tariffs Aren’t Hitting Earnings—Yet. Why That Might Not Last.

Caterpillar is one of the companies that are slashing costs to offset tariffs. (Justin Sullivan/Getty Images)

The impact of President Donald Trump’s sweeping tariffs has been muted so far, largely due to the maneuvering companies have been quietly doing behind the scenes.

Companies have begun sourcing products from countries with lower costs, and they have been reclassifying imports so that they come in tariff-free under the U.S.-Mexico-Canada Trade Agreement. And they have been slashing costs to give them the financial flexibility to absorb tariffs costs without impacting their profitability—though there are some notable exceptions.

The bottom line is that aggregate corporate margins remain at high levels, and consumers have been largely shielded from rising prices.

How long this can continue isn’t clear. The growing consensus within corporate offices is that tariffs are here to stay, but consultants and lawyers say companies aren’t ready to make significant shifts to supply chains or invest aggressively in U.S. production until there is more clarity on where trade policy lands.

After all, details of most of the trade pacts announced are far from finalized, more sectoral tariffs still loom —and the Supreme Court is e xpected to hear in early November the administration’s appeal on lower courts’ decision that the tariffs th e administration imposed using the International Emergency Economic Powers Act are illegal. If the Supreme Court agrees with lower courts, a bunch of tariffs could be thrown out—at least temporarily.

While tariffs have been in the headlines for months, a swath only recently went into effect as deadlines were extended for dealmaking. Barclays estimates that only half of all goods imported by the U.S. are currently under a tariff—though the administration continues to add more to the list, most recently on certain pharmaceuticals, furniture and heavy trucks.

A handful of big companies have already felt the hit and quantified the fallout: General Motors warned tariffs would cost it $5 billion this year; Caterpillar estimated up to $1.5 billion impact from tariffs; and Apple warned it would take a $1.1 billion hit in the fourth quarter after an $800 million hit in the June quarter due to tariffs.

Overall, though, a look at second-quarter earnings call transcripts showed less than 10% of U.S. companies signaling tariffs would hurt earnings in a material way and another 28% said it could have a “modestly negative” impact on their results, according to HSBC global strategists. Net margins, the best gauge of whether companies are absorbing the higher costs or passing on the costs to customers and suffering a volume hit, are at four-year highs.

But that limited impact is in part because prominent sectors in the market—like technology, communications services and financials, are little impacted by tariffs, Nicole Inui, HSBC’s head of equity strategy, Americas, tells Barron’s. By contrast, in sectors hard-hit by tariffs, like consumer staples, the read is different; almost 80% of earnings calls featured executives talking about a negative impact from tariffs and there are signs the impact is beginning to creep in.

In its recent earnings call, jewelry retailer Signet said it is trying to minimize the impact of tariffs with discussions with suppliers to make as much as it can domestically. India accounts for about half of its finished merchandise purchases. With the country facing 50% tariffs on its exports, Signet said it would use its existing inventories and shift some production elsewhere, as well as evaluate pricing and promotions and turn to bonded warehouses where it can offload merchandise until it needs it.

Companies are going after low-hanging fruit to reduce their costs and tariff exposure—deducting international freight charges, making sure they aren’t paying duties on warranty costs embedded in price for goods and reducing unit price by thinking through how design work and royalty payments are incorporated, says Laura Rabinowitz, an international trade lawyer at Greenberg Traurig. She works with companies with revenue of $500 million to $2 billion that don’t have the leverage larger firms have to maneuver around the tariffs more easily.

International trade lawyers are spending a lot of time analyzing rules of origin*,* requirements that dictate what percent of product has to be made or significantly transformed in a country to qualify for its tariff rate. That is pushing some companies to redesign products or substitute suppliers for certain inputs.

But even here, companies aren’t being overly aggressive—in part because rules of origin are expected to be a major point of debate in the upcoming review of the U.S.-Mexico-Canada trade pact and is also a detail that needs more fleshing out in trade pacts the U.S. has announced with countries in southeast Asia, including Vietnam. The preliminary deal with Vietnam, for example, imposed a higher tariff of 40% on any goods deemed as” transshipped” with scant details on how the administration defines that term.

Some companies have set up dedicated “command centers” to deal with the complexity of the situation, bringing together strategy, operations, sourcing, compliance, and commercial leaders to model tariff impacts, track competitor moves, and adjust pricing and sourcing strategies on the fly. They all sit together in one room, says Marc Gilbert, global lead for consultancy BCG’s Center for Geopolitics.

“The most advanced command centers are now AI-enabled, giving companies the ability to simulate scenarios instantly and respond with speed and precision,” Gilbert says. These tools are being used to assess exposure, analyze how tariffs will impact competitors and help inform areas companies can raise prices without giving up market share, how they can improve negotiations with vendors and rethinking supply, manufacturing and logistics networks to minimize the hit.

“There are two conclusions that are ironclad: Companies need to be more cost-efficient and the world as we knew it with seamless global supply chains to serve America is a thing of the past; there will be more friction and direction of travel is likely regional blocs,” Gilbert says.

Based on BCG’s surveys of manufacturers this spring, more than three-quarters of manufacturers are prioritizing cutting costs over other measures. It’s apparent in earnings calls as well: Caterpillar executives said they were already trimming discretionary spending as part of efforts they could take quickly and reverse if needed.

Lowe’s Chief Executive Marvin Ellison recently told Barron’s the company was diversifying where it sources its products and working with suppliers to share the tariff hit. In an earnings call earlier in September, Lululemon Chief Financial Officer Meghan Frank said the company was strategically adjusting pricing, negotiating with vendors and looking for cost-cutting companywide as it tries to mitigate increased tariff costs.

Large companies, meanwhile, are borrowing a page from countries that have attempted to “buy down” their tariff rate by coming to the table bearing gifts—typically in the form of multibillion-dollar investments or purchase commitments. Many companies are relying on personal diplomacy, trying to get their chief executive in front of Trump, especially if they have investments or other commitments they can package together for a meeting, Gilbert says.

This is different than in the first administration, which had a more formal process for companies to apply to exemptions to avoid tariffs. One of the hallmarks of the second term has been the administration’s interest in striking pacts that generate a direct economic benefit for the government, according to analysts at Beacon Policy Advisors.

Even with these efforts, trade lawyers and consultants are bracing for more pain as persistent tariffs will require companies to go beyond the low-hanging fruit for mitigation—and think through longer-term investments aimed at rejigging the global trade routes that have dominated over the last couple of decades.

In its economic outlook this week, the OECD stressed that the full impact of tariff rates—which it estimates to be an effective 19.5%—has yet to come.

The OECD said the U.S. economy has been shielded from the impact in part because of the backlog companies built up ahead of tariffs and ample profit margins that allowed them to shoulder some of the hit in the near-term to avoid price hikes. The OECD expects the U.S. economy to grow 1.8% this year and 1.5% next year, down from 2.8% in 2024.

Investors in U.S. companies should keep close watch on corporate profits as tariffs spread across the economy. There may come a point when companies can no longer maneuver around tariffs—but we aren’t there yet.

Write to Reshma Kapadia at reshma.kapadia@barrons.com