Capital Markets Update #10

We’ve got about 10 months worth of data on the Tariff topic, it’s reasonable to assume companies have settled into the new trade world order in a manner they deem most efficient.  Its likely many “major decisions” have been made, not all ramifications have been felt; but, beneath the surface, the economy is changing.  The question is, what measurable impact has the administration’s protectionist trade policy had on the US economy?

The effects of the President’s move to recalibrate the existing, relatively globalist trade paradigm cannot be summed up in narrow, punchy soundbites.  We’re not entirely sure whether you can even call the policy a success or failure, at the moment.  It seems to us the sum total of the policy’s impact is too broad to render a decisive “yes or no” vote useful, and how would we even define success or failure?  Are we talking about the onshoring of domestic manufacturing, GDP growth, an increase in foreign direct investment, dollar value, the 10-year yield, inflation, the US budget deficit, employment, S&P 500 stock price, or foreign policy leverage?

We’ve written about a few of these topics in the past.  It’s our view that onshoring of domestic manufacturing may be underway but we don’t yet know for sure, same with the Administration’s statements around exorbitant foreign investment into US capital projects.  The dollar market is a function of many complex variables such that one cannot pin current price levels (which aren’t even that low) on trade policy.  Obviously inserting trade barriers into negotiations with the wealthiest, most consumptive nation in the world creates foreign policy leverage.  Just released on Wednesday, foreign investors purchased a net $1.6T in US assets (government bonds, corporate bonds, US stocks, etc.) throughout 2025, which is up 30% YoY from $1.18T net purchases in 2024 (US Treasury data).  That’s a different datapoint than the Administration’s promised capital project FDI, but undoubtedly indicative of a broader “Buy America” trade as opposed to the alternative. More on that some other week.  

So, in the face of all that, what is actually informative relative to measuring the tariff regime’s impact on the US economy?  The New York Fed recently published a thought piece which concludes that about 86% of “applicable tariff costs” on goods imported into the United States are paid by US importers.  For reference, the tariff rate is one number (about 13% currently – NY Fed), the actual duty rate paid (about 10% - NY Fed) is a separate number which takes into account loopholes, exclusions, etc. Unfortunately, the NY Fed does a woefully inadequate job at providing supporting data to back up their conclusions; but, if you take the institution at it’s word, US importers paid approximately 94% of tariff-related expenses from January – August 2025, which has since dropped to approximately 86% as of November 2025.  Said another way, according to Fed math, that average 10% duty incurred by US importers in November 2025 represents an approximately 86% share of the total tariff price impact.  The other 14% of the price impact was incurred by foreign exporters dropping prices.  Hopefully that makes sense.  What’s interesting is that the dollar weakened broadly against international currencies in 2025, so in reality, we had to use more dollars to pay for the same amount of stuff throughout the year.  Thus, if you were to currency-adjust these figures, which it appears the NY Fed did not, the absolute price effect on US importers may be slightly understated, if anything.  Accordingly, we can see how businesses manipulated supply chains to pay a lower tariff rate.  The sum total of customs duties paid divided by the total value of imports rose from 8% in May 2025, peaked at close to 11% in October 2025 and has since dropped to 10% by November 2025.  Similarly, Chinese share of imports has dropped from 15% in 2024 to 10% today, while Mexico share has experienced a notable 2.5% jump and “other’ country share of imports has increased from 26% to 32%.   So, its clear companies are taking advantage of loopholes and geographic arbitrage to reduce their actual payment rate, or duty rate. 

Morningstar put out a thought piece noting which sectors of the S&P 500 were expected to experience the highest degree of tariff-related exposure to cost increases.   Morningstar concluded cyclical retail (Best Buy, Williams Sonoma), apparel, defensive retail (Dollar Tree, Target), Industrial Products (Dell, Caterpillar, Western Digital) and a few others had the highest exposure to tariffs.  CSI Market provides an interesting and very helpful data breakdown for subsectors within the S&P 500.  The data is a little volatile, but helpful nonetheless.  According to CSI, Retail sector gross margins, writ large, have dropped from 23.2% in Q4 2024 to 20.7% in Q4 2025.  Apparel company gross margins dropped from 52.6% in Q4 2024 to 50.6% in Q4 2025.  By the way, who knew apparel was so profitable?  Auto manufacturer gross margins dropped from 16.2% to 10.7% over the same period.   Construction and Mining machinery margins dropped from 33.8% to 32.4% YoY, while industrial machinery margins dropped from 38.0% to 37.7%.  

Our takeaway from this data is that the majority of actual duty expenses are being born by the importers and the manufacturers of goods domestically, causing margin compression amongst tariff-exposed corporate sectors (primarily small, but also large businesses).  Take Lululemon, for instance.  Lulu operated at a 56% gross margin in Q4 2019, jacked prices to increase its profitability to 59% gross margin by Q2 2025 and has since fallen back to a 58% gross margin by Q4 2025.  Lulu is a good example of a company which increased prices on consumers throughout 2025 to try and maintain their margin and lost marketshare as a result (down to 24% of DTC athleisure market by 12/25 from 30% marketshare as of 1/25 – Consumer Edge data) .  Nike gross margin went from 44.9% (Q4 2019), to 46.2% (Q1 2021) to 41.1% today.  Target is another good example, albeit slightly distorted due to the political disruption it experienced in 2023.  Target entered the pandemic at a 29.7% gross margin, peaked in 2021 at a 30.2% gross margin and has since retrenched to a 27.8% gross margin (all previously referenced profit data are from Macrotrends).  We think this data tells us that the goods world is hyper competitive and companies can’t purely pass through costs onto consumers.       

In conclusion, it appears tariff-exposed corporations are reworking supply chains to avoid the highest tariff face rates.  Companies are then further re-working their products to include a lower quantum of tariffed goods.  The resulting cost increases on tariff goods are primarily being born by US companies and are not being passed through, by and large, to consumers.  As a result, corporations largely exposed to tariffs are being forced to give back much of the margin gains they took during Covid.  Ultimately, the present pricing regime could be considered the second-best case scenario from the Administration’s standpoint.  Obviously, the Administration would have liked to see import prices drop 13% to make their point. But, solving to a 2.5% January 2026 YoY Core CPI reading (BLS) while capturing $195B in tariff revenue in 2025 (US Customs), at record S&P 500 prices, a 4.3% unemployment rate, and strong small business optimism isn’t a bad bridesmaid.