The dip buyers have won — for now
For all the macroeconomic chaos we’ve endured so far in 2025, the S&P 500 is flat year to date and so is the US 10-year bond yield, with the bond performance being far more surprising than the equity rebound.
The S&P 500 is 21% above its 52-week low, so dip buyers have been richly rewarded. The index has been there and back again this year, Bilbo Baggins-style, with the real test being how the tariffs settle and filter through the US economy.
Looking deeper into company announcements is the best way to understand the prevailing corporate sentiment. For example, there were 52 mentions of the word “tariff” in the latest Walmart earnings call transcript. To say that it is top of mind for retailers and investors alike would be an understatement.
Walmart makes it clear: the current tariff proposals would make it impossible for it to absorb all the pressure due to narrow retail margins. In other words, price increases are coming.
At first blush this claim seems cheeky, as Chinese suppliers are presumably in categories such as general merchandise, where retailers have much higher margins than in categories like food. But further on, Walmart says tariffs on Costa Rica, Peru and Colombia, among other countries, have put pressure on items such as bananas, avocados, coffee and even roses. With a complex global supply chain, Walmart is in the crosshairs of this trade war.
The mitigating factor is that about two-thirds of Walmart’s products are made, assembled or grown in the US. The company committed a few years ago to more than double the value of its US procurement over the next decade. We can safely assume that the current approach by US President Donald Trump will accelerate this plan. This is much easier in certain categories than in others, as there are products where the US simply cannot be competitive.
The reference to “assembled in the US” shouldn’t be taken lightly. Even the brands seen as traditionally American are at risk, as their products use components from places such as China. Even if tariffs hurt only a portion of the input costs, it will put pressure on the cost of the finished goods.
The old saying is that “retail is detail” and this will apply here. Walmart has such a wide product range that there will almost certainly be tweaks to optimise the on-shelf assortment in a tariff environment. Some products may simply fall away, while others might become more competitive if Walmart can change the underlying components and fall out of the tariff net.
The overall message from Walmart is that though it is really difficult to guess where tariffs might land at this point, it is maintaining its long-term guidance of 4% annual sales growth and expansion of the operating margin, which implies profit growth at mid- to high single digits. 2025 will be choppy, though, not least of all due to inventory accounting rules and the impact this could have on quarterly gross margin, with the company making it clear that elevated tariffs could eat up full-year earnings growth altogether.
Walmart’s share price is up 7% year to date at the time of writing. It’s quite incredible how the market has just shrugged off the risks. This is the broader theme that has bears shaking their heads in disbelief.
Home Depot is another well-known US retailer, but it hasn’t had quite the same support from the market. The share price is down 4.5% year to date, reflecting the mix of discretionary (price-elastic) items in its business model vs the defensive staples at Walmart. And yet, the word “tariff” appeared just six times in the latest transcript, suggesting it is far less of an area of focus than at Walmart.
The management commentary confirms this suspicion, with Home Depot noting that more than 50% of purchases are sourced in the US. Within the next 12 months, no country outside of the US will represent more than 10% of purchases. Here’s the really big news, though: Home Depot is playing to the Trump script and intends to absorb increases rather than pass them on to customers. It talks about its “productivity” and makes mention of how it’s a “great opportunity for suppliers to take market share” — a way of saying that it will be pushing the pressure back up the value chain. As for exactly where those supplier negotiations will land, only time will tell.
It seems that there’s a broader concern about the state of US consumers
Though Home Depot’s supply chain is better insulated against a trade war than Walmart’s, the market has punished the share price anyway. Home Depot is still trading at an elevated multiple (a p:e of 25.2 vs the three-year average of 21.6), but Walmart is in a similar relative position, at 41.2 vs a three-year average of 34, so this doesn’t explain the Home Depot vs Walmart performance this year.
It seems that there’s a broader concern about the state of US consumers, where defensive stocks with less flexible supply chains are preferred to more cyclical stocks with flexible supply chains. This is a bearish view on US consumers.
Another lens through which to view the environment is that of banking. JPMorgan recently held an investor day and everyone paid attention, as Jamie Dimon and his team are held in high regard. The word “tariff” came up 18 times, showing how a trade war impacts not just retailers but the broader macro environment as well.
Of course, the key variable at JPMorgan isn’t the products on shelves and where they came from, but rather what the trend in the unemployment rate might be. With such broad exposure to consumers and corporates, JPMorgan doesn’t want to see a meaningful jump in unemployment that would drive an immediate increase in credit loss provisions, followed by several quarters of tracking realised losses against those provisions.
There are several other key metrics. For example, JPMorgan is tracking exposure to high-margin vs low-margin retailers, recognising that retailers with high margins are more defensive as they can absorb the tariff increases. The bankers care more about downside risk (which comes through as credit risk) than upside potential, at least in the short term, so they can escape unscathed even if retailers watch their profit margin diminish.
Another area of focus is the automotive sector, as pre-tariff inventory will soon be depleted and the impact of tariffs will be felt in consumer demand.
As a cautionary tale, Dimon referred to the 1970s when Richard Nixon was president and tariffs drove a huge sell-off in the market. Dimon is worried about the current complacency among central banks and the market at large, evidenced by the bounce-back in the equity index.
But perhaps the most poignant comment relates to the rates in the market. While central banks may set short-term rates, it’s the market that sets the long-term rates — and that’s why people refer to the bond market as the bully in this situation, rather than the equity market.
The bond yields aren’t doing much bullying just yet, though short-term market reactions to each tariff announcement have sent a warning. For now at least, the buy-the-dip crowd is smiling — but they should be keeping a close eye on the bond market.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.