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Investing.com -- S&P 500 companies entered the second quarter facing the first real test of newly expanded tariffs, and while results came in better than feared, the margin drag is visible.
Strategists at Barclays found that a limited sample of firms pointed to a median 60-70 basis point gross margin hit from tariffs, broadly in line with its own estimates based on Census and BEA data.
Few companies reported meaningful demand destruction so far. Instead, most have absorbed costs, pulled forward inventories, or passed some of the burden through pricing.
Industrial and technology firms have been more successful in passing on costs compared with consumer companies, where price sensitivity is higher.
Retailers and discretionary businesses front-loaded inventory ahead of tariff hikes, a tactic that may protect margins temporarily but risks pressure in the second half (2H) as higher-cost goods work through supply chains, strategists said.
Mitigation strategies focus on supply chain diversification, local-for-local manufacturing, and tighter cost control. Many companies described the tariff environment as “de-risked” following recent trade agreements, with enough visibility to bake impacts into guidance.
“Gross margin impact estimates span a wide range from flattish at the low end to double-digit percentages on the high end; the median impact is around 60-70bp,” a team led by Venu Krishna wrote.
By sector, Industrials have leaned on phased-in price hikes, contract repricing, and targeted surcharges to offset higher costs.
Tech firms, particularly those tied to Asia-based manufacturing, face tariffs as a structural headwind but can pass costs through where products are differentiated.
Consumer-facing businesses report weaker pricing power, with discretionary and value-oriented products most exposed to margin erosion.
Staples producers highlight elevated elasticity and a greater reliance on productivity and mix to preserve profitability.
Healthcare companies, meanwhile, are largely absorbing tariffs given payer contract dynamics, though medtech players are moving toward dual sourcing and local production.
For investors, tariffs appear to have slipped down the worry list. Equity multiples for exposed sectors are now trading more on broader themes such as fiscal policy, regulatory reform, or data center investment.
Still, Barclays flagged that Q3 EPS revisions for retailers are already running worse than historical trends, while holiday quarter estimates remain largely intact — a sign that further cuts may be needed as higher-cost inventories flow through.
At the index level, valuations suggest markets are looking through tariff headwinds, with the S&P 500 trading at 22x forward earnings.
Yet, strategists caution that “if the margin dilutive effect of tariffs is expected to worsen over the next few quarters, we’re skeptical that valuations would be unaffected, especially for sectors and industries that report limited ability to pass through price.”