Earnings Season Showing Signs Tariffs Are Seriously Impacting Companies | What's Moving Your Money

Key Concepts

• Tariffs: Taxes imposed on imported goods and services.
• Free Cash Flow: Cash a company generates after accounting for cash outflows to support operations and maintain its capital assets.
• Inflation: A general increase in prices and a fall in the purchasing value of money.
• Supply Chain: The network between a company and its suppliers to produce and distribute a specific product to the final buyer.
• Competitive Advantage: Conditions that allow a company to produce goods or services at a lower price or in a more desirable fashion for customers.
• Monetary policy: Actions undertaken by a central bank to manipulate the money supply and credit conditions to stimulate or restrain economic activity.

GM Earnings and Tariff Impact

• Poor Earnings Report: GM's earnings report was described as significantly negative, with few positive takeaways.
• Net Income Drop: Net income fell by 35% compared to the same quarter last year.
• $1.1 Billion Charge: GM had to take a $1.1 billion charge off due to tariffs and decreased production costs in the US, Canada, and Mexico.
• Free Cash Flow Reduction: This charge led to a $1 billion drop in free cash flow.
• 2025 Projection Impact: GM is projected to earn $8 billion in free cash flow in fiscal year 2025. The tariff impact could reduce this by $4 billion, essentially halving their expected profit.
• Stock Market Reflection: The stock market is a reflection of the future earning power of a company. GM's stock was down 8%, its biggest fall since April, validating market expectations due to the tariff impact.
• Tariff Exposure: GM is exposed to auto tariffs, steel and aluminum tariffs, tariffs on production in Canada, Mexico, and South Korea, and battery tariffs affecting their electric vehicle line.
• Compounding Effect: The accumulation of multiple tariffs, rather than a single tariff, is causing the most significant problems for GM.
• Supply Chain Concerns: The auto industry has a very deep supply chain involving hundreds of vendors. Layoffs in the auto industry could cascade through the entire economy.

Cleveland Cliffs and Steel Tariffs

• Price Increase: Cleveland Cliffs, the largest US steel maker, announced a 15% price increase after already raising prices double digits the previous quarter.
• 25% Tariff Advantage: A 25% tariff on foreign steel allows domestic steel makers to raise prices, taking advantage of reduced competition.
• Textbook Inflation: This price increase is not genuine growth but pure inflation.
• Reduced Competitiveness: In the long run, tariffs make Cleveland Cliffs less competitive globally because they become reliant on the domestic advantage.
• Training Wheels Analogy: Companies protected by tariffs become less competitive and reliant on government support. They're not going to bother selling it in France or in Argentina or in South Africa. And if they do try it, and guess what? In those countries, they're not going to have the advantage of tariffs, right? The that protection that our tariffs are giving them, they become less competitive.
• Global Competition: In today's interconnected world, companies must compete globally, not just locally.

Upcoming Market Events and Credibility Concerns

• Busy Week Ahead: The upcoming week will be busy for markets, with a Federal Reserve meeting and the August 1st tariff deadline approaching.
• Federal Reserve Meeting: Drama surrounding Fed Chair Powell, including potential firing, resignation, or criminal investigation, is expected.
• August 1st Tariff Deadline: President Trump's credibility is at stake regarding the August 1st tariffs.
• Trade Deal Skepticism: A lack of substantial trade deals, with the most recent being a minor tariff reduction with the Philippines (lowering their tariff rate from 20% to 19%), raises concerns.
• Credibility Crisis: Repeatedly setting and then extending tariff deadlines will erode President Trump's credibility with trading partners and allies.

Conclusion

The episode highlights the real-world impact of tariffs on major American companies like GM and Cleveland Cliffs. GM is experiencing significant earnings decline due to the accumulation of various tariffs, while Cleveland Cliffs is raising prices due to reduced competition from foreign steel. The presenter warns that these tariffs are not fostering genuine economic growth and could make domestic companies less competitive in the long run. The upcoming week's market events, particularly the Federal Reserve meeting and the August 1st tariff deadline, will be crucial, with President Trump's credibility on the line. The main takeaway is that tariffs, while intended to protect domestic industries, can lead to inflation, reduced competitiveness, and potential economic instability.