“EAT THE TARIFFS.”
That was President Trump’s response to Walmart on social media.
The retail giant sparked his ire following its most recent quarterly earnings report. Walmart warned that price hikes could start this month due to the impact of the trade war.
Walmart’s CFO offered a blunt warning. He said that “the magnitude of these [tariff] increases is more than any retailer can absorb.”
Companies face a difficult decision – either eat the cost or pass it on to consumers via higher prices.
Other major retailers are keeping quiet on price hikes for now, but more could soon follow Walmart’s lead.
That’s because a squeeze on profit margins has companies crying uncle…
A Squeeze on Margins
Many major retailers have kept quiet about price hikes despite the impact of tariffs.
Target executives pushed aside plans for price hikes. Its CEO called price increases the “very last resort.” But at the same time, the company lowered its financial forecast and now expects a modest decline in annual sales.
Companies that are sensitive to consumer spending keep revealing that sales and profits are feeling the impact of tariffs.
And similar to Walmart, other companies may not be able to hold out for long.
Let’s look at one little-followed metric in the Producer Price Index (PPI) inflation report.
The monthly PPI includes something called “trade services.” In simple terms, it measures the difference between what wholesalers and retailers pay for goods and the prices they then charge their buyers.
In the most recent report for April, that figure dove by 1.7%. Higher costs are eroding profit margins. Have a glance at the chart below:
April saw the second-largest drop over the past 15 years (arrow).
Another round of tariffs against 54 other countries is still looming. That could spell even more pain for profit margins… and the earnings outlook.
That’s a caution sign for investors…
Margins Impact Earnings
Over the long term, stock prices follow earnings.
Earnings for the S&P 500 hit $210 per share last year. That’s a record level that helped drive the index to all-time highs.
Expanding profit margins have been a major factor in rising earnings. From 2001 to 2024, increasing profit margins accounted for 41% of the earnings growth in the S&P 500. Sales growth drove the other 59%.
Through the first quarter of 2025, profit margins accounted for 54% of earnings growth.
But we weren’t really feeling tariffs yet in the first quarter.
So retailers are beginning to sound the alarm on profit margins, and now it’s showing up in the PPI data on a broad scale.
Evidence of falling profit margins could pose a big problem for the stock market. A drop in profit margins means less earnings for investors.
Investors are hoping for a quick resolution to the trade war. But we saw new headlines last week, like the 50% tariff on the European Union and the 25% tariff on iPhones made outside the U.S.
Tariffs were already clouding the outlook for consumer spending and the demand picture. Now tariffs are hitting corporate profit margins as well… presenting another risk to corporate earnings.
That means investors should keep a close eye on risk management in the months ahead. We haven’t seen the last of market choppiness this year…
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
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