Tariff Two-Step: What to Watch as Earnings Begin

U.S. companies—hit by President Trump's tariffs and then by a 90-day delay excluding China just ahead of reporting earnings—are maneuvering to explain changing circumstances. While the timing was inconvenient for corporations, it's helpful for investors, who now get a first glance at how firms plan to react in a situation that remains uncertain even after most countries got an extension Wednesday. But investors should stay alert for what could be novel moves by many companies.

On Monday, for instance, Levi Strauss (LEVI) reported results and kept revenue and earnings guidance unchanged for fiscal 2025. However, the company said its guidance "does not reflect any impact from the recently announced tariffs." In other words, because the company doesn't know how tariffs will play out, it didn't try to codify the business impact.

"Obviously the news on tariffs is very new" said CEO Michelle Gass, in a transcript of Levi's call with analysts. "It's fluid. We, like the rest of the industry, are getting our arms around it."

Other companies might follow Levi's lead in giving guidance that leaves out tariff impacts. If so, investors would still receive outlooks from many firms, but with more vagueness. While guidance is never set in stone, it appears this time around investors might want to take company outlooks even less literally than in the past. 

This matters to investors trying to price individual companies but also could affect overall market clarity. Wall Street analysts partly rely on company input to estimate future revenue, margin, and other metrics. If they don't have the full picture, it will make their estimates less reliable. Analysts' estimates are compiled and averaged out across the market, so vagueness in guidance would mean less insight into future S&P 500 earnings. This could create more uncertainty and volatility.

"Given the high uncertainty around the potential impact of the shift in global trade policy and, by extension, to the global economy, it wouldn't be surprising to me to see companies either refrain from issuing guidance, or even drop previously issued guidance, similar to what was observed around the start of the pandemic," said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research.

Guidance or lack thereof could also tell investors more about where companies stand. "Those companies that that offer up healthy guidance might indicate that they're relatively immune to the impact of tariffs," Peterson said.

Though last quarter's results will likely draw less attention, this earnings season could provide more "show and tell" as analysts ask executives to peel back the curtain for insight into the future tariff impact.

"I wouldn't be surprised if analysts at least try to get companies to talk about visibility, to talk about how they plan to navigate around this uncertain playing field," said Liz Ann Sonders, chief investment strategist at Schwab, in the latest Schwab OnInvesting podcast. "Are they continuing to postpone investment plans, capital expenditure plans? What does their own individual labor market situation look like? Do they have a way to think about protecting profit margins, especially a company in an industry really on the front lines of being at the mercy of these tariffs proposed and otherwise?"

Other things to look for during earnings as companies adjust to changing trade policy—where tariffs on Chinese goods are now 125% and a 10% across-the-board tariff on all countries remains in effect even after the Trump administration gave most countries a breather on "reciprocal" tariffs beyond that yesterday—include:

Stock buybacks: With stock prices low, some companies may use earnings announcements to start or expand buybacks of their own stock. Semiconductor firm Broadcom (AVGO) got the ball rolling this week with a $10 billion stock buyback, though it's not reporting quarterly results anytime soon. It might be tempting for companies to buy back stock at these low levels if they can afford it and would potentially give weary investors a chance to enjoy what's sometimes an associated boost in share prices.

Dividend cuts: When companies hit bumps in the road and see their margins threatened, they often look to cut costs. One way is slicing dividends. Though it can disappoint investors, it's less of a structural change than laying off employees or closing factories. Investors may want to check the financial health of dividend-paying companies and prepare for possible changes, especially if Treasury yields continue to spike and raise borrowing costs. Companies with heavy debt are among those traditionally more likely to cut dividends in a tighter credit market.

New income sources: Micron (MU), a semiconductor chipmaker, will impose tariff "surcharges" on certain products, Reuters reported this week. This brings to mind "baggage fees" airlines first imposed 15 years ago as oil prices soared. Companies may add surcharges to their business or consumer customers, which in some ways may be less dramatic than an outright price hike. The surcharges conceivably would go away when and if tariff levels come back to Earth. Though the same can't be said of baggage fees, sadly.

Change of plans: In these complex times, companies might decide to hunker down and delay big moves they'd previously outlined. This could lead to the postponing of mergers and acquisitions (M&A), cuts in capital expenditures, or protective moves like banks setting aside more "loan loss provisions" that would hurt profit but potentially protect their business if customers default. Also, several tech companies have delayed their initial public offerings (IPOs). Some of these same moves happened during the pandemic.

Stepping back: Airlines may cut certain flights or change aircraft on others to adjust to falling demand amid worries over a recession. Hiring plans might be postponed or canceled. And layoffs may mount. Earnings season can be bad news for employees in a slumping economy.

Increased clarity: Though it might not happen immediately, tariffs put pressure on corporations to explain more about what's normally not shared with Wall Street. For example, consider pharmaceutical firms and their Active Pharmaceutical Ingredients (APIs). These elements are often made overseas, which in the past wasn't necessarily an issue but may be now. Analysts may try to get a better picture of where companies source these ingredients, and their prices, to see if certain firms might be positioned for a worse hit from tariffs. In addition, companies across most industries could get asked about potential price hikes. Levi Strauss, for instance, said any price hikes would be "surgical."

Manufacturing changes: Though most companies won't be able to immediately bring manufacturing back to the United States, some might announce initiatives to do so, or to move production from heavily targeted countries to those with less tariff risk. This is expensive and time consuming, meaning it could eat into margins.