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Target Corporation (TGT) - free report >>
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The Earnings Impact of the New Tariff Regime
Tariffs are starting to become a material headwind to the overall corporate earnings picture, raising doubts about current market expectations for the coming periods. This follows the overall positive trends that emerged out of the Q4 earnings season, with the growth pace showing a notable acceleration from the trend line of recent quarters.
The way tariffs weigh on earnings outlook is either through pressuring margins or revenues or both. When a company, say Best Buy (BBY - Free Report) , is faced with higher tariffs on its merchandize, it will either have to absorb all of the incremental cost on its own, share it with its foreign supplier, or pass all or part of the tariff effect to its customers. All of these options are problematic for Best Buy’s earnings outlook, with the in-house absorption option causing margin suppression and the pass-through option potentially resulting in a lost sale.
Best Buy is a good example of understanding the impact of tariffs, as the bulk of its merchandize is sourced from abroad, with Mexico and China as notable countries of origin. Other retailers like Target (TGT - Free Report) and Walmart (WMT - Free Report) will also have such exposure, but they have a relatively smaller proportion of their merchandize subject to higher tariffs and they also likely have greater flexibility in where they can source their merchandize from.
Estimates from Goldman Sachs suggest that an incremental 5% higher tariff, outside of Canada and Mexico, will have a negative earnings impact in the 1% to 2% range and a comparable incremental tariff on these two neighboring markets will cause an additional negative earnings impact in that same range.
Keep in mind, however, that none of this is carved in stone at this stage, as we have yet to see the final shape of the new tariff regime and for how long they will remain in place. The associated uncertainty with all of this tariff talk is also problematic, as it has started to weigh on consumer and business confidence.
For more details about the evolving earnings picture, please check out our weekly Earnings Preview article here >>>Previewing the 2025 Q1 Earnings Season