A Bit of Tariff Clarity and One of My Trades
As new tariff arrangements appear a positive, the full impact of levies has yet to be felt; also, here's one covered-call retailer holding I'm betting big on.
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The United Stated has announced new trade arrangements with Indonesia, the Philippines, and most importantly Japan in recent days. Trade discussions with Europe also appear to be making some progress before the deadline of Aug. 1. While many details are yet to be known and many other trade deals are yet to be struck, it appears the average tariff on imports into the United States will be around 15%. While that is lower than feared, it is much higher than it has been for many generations.
New trade agreements will at least provide certainty for businesses. Increased tariffs will also open an important recurring revenue stream for the overly indebted federal government. New capital investment to reshore and nearshore manufacturing capacity in the coming years should also be a solid economic driver. In time, the hope is, this will bolster a long-beleaguered blue-collar workforce.
Investors should not take a victory lap around these developments, however. The full impact from new tariffs is a long way off from being fully felt yet. Higher tariff rates have not resulted in higher inflation to date. But part of this is due to importers front-loading cargo shipments to avoid higher levies. In addition, corporations seem to have taken a good portion of the additional fees for now, which has negatively impacted their profit margins. An investor can see this within the second quarter results of General Motors GM, where new tariffs were blamed for $1.1 billion in additional costs for the quarter.
Investors also seem to be ignoring how tariffs will play out on profit growth both in 2025 and 2026. FactSet posted this week that the analyst firm consensus has moved down to projecting S&P 500 earnings growth of just 9% this year after starting 2025 with a projection of profit growth in the low teens. But not to worry, they see 14% earnings growth for the S&P 500 in 2026. Of course, that was right near what they originally expected for 2025.
Despite the slide of earnings growth projections this year, the S&P 500 and Nasdaq have rallied to all-time highs. I believe it is more important to investors than ever to understand what they are carrying in their portfolios. Especially around what will be the longer-term impacts to the companies they hold from these new trade policies. I will continue to peruse the quarterly reports coming out from the firms I hold positions in closely.
An investor does not have to necessarily jettison those holdings that will see measurable ramifications from tariffs. But they would be well-served to at least fully understand these impacts. For example, I have a decent-size covered-call holding in Abercrombie & Fitch ANF. Like most apparel retailers, most of their merchandise is sourced from southeast Asia. Abercrombie & Fitch last reported quarterly results in late May.
The company has a flexible manufacturing base, and quite importantly, small exposure to imports from China. The new trade deal with Vietnam that was announced this month should help provide certainty to management. It should be noted that Vietnam provided 35% of the merchandise for Abercrombie in fiscal 2024. Combine my confidence that leadership has a good handle on the tariff situation, the company recently raising its sales guidance, and a price-to-earnings around 9; I remain a holder of the stock.
I plan to do similar analysis on the holdings in my portfolio as second quarter results continue to hit the wires. I encourage other investors to do the same. In Monday’s column, I will highlight some names in my portfolio with more than reasonable valuations that should see little to no impacts from the new tariff regime.
At the time of publication, Jensen was long ANF.
