Tariffs Test S&P 500 Margins
Tariffs impact consumers and corporations. US companies' high gross margins may absorb costs without affecting profitability, but economic growth and rising input costs remain concerns. Despite these pressures, companies are currently well-positioned to handle challenges.
The prospects of tariffs continue to dominate investor anxiety. Effects from tariffs will be on consumers and corporations alike, with both likely sharing the brunt of higher prices.
The United States, currently leading the global tariff discourse, enjoys some of the highest corporate gross margins among major economies. S&P 500 gross margins are currently at historical highs (34.4%) and have an impressive advantage over MSCI Europe (28.4%) and Japan (27.2%). The question becomes, will these companies be able to pass along higher tariff costs without impacting margins? Probably not.
At a time when wage inflation is slowing, consumers probably will not have the appetite to bear all the increased prices, leaving corporations to absorb the rest which will pressure margins and ultimately profitability. But with margins at historical highs, they are starting from a healthy position.
President Trump has started his term with disruptive policies first. If consumer demand wains and company earnings deteriorate, the prospects of tax cuts may soothe some of the effects from tariffs, but this currently remains an open question.