Expect 'choppy sailing' in markets going into year end, says BMO's Carol Schleif

Key Concepts:

• Tariffs: Taxes imposed on imported goods.
• Services Sector: Economic activity related to providing services rather than producing goods (70% of production and purchase side).
• CPI (Consumer Price Index): A measure of the average change over time in the prices paid by urban consumers for a basket of consumer goods and services.
• Margins: The difference between a product or service's selling price and the cost of production.
• Idiosyncratic: Peculiar to one individual; unique.
• Monetary Policy: Actions undertaken by a central bank to manipulate the money supply and credit conditions to stimulate or restrain economic activity.
• Data Dependency: An approach to decision-making that relies heavily on incoming economic data.

Tariffs and Market Reaction

• The market has largely absorbed the impact of tariffs, even reacting positively to their implementation.
• This acceptance is attributed to the clarity that tariffs provide for businesses.
• Businesses have demonstrated resilience, exceeding initial expectations, particularly in light of Liberation Day amounts.
• The services sector, which constitutes a significant portion of the economy (70%), is a key area of focus for potential tariff impacts.
• Foreign students paying full tuition at universities contribute to services spending, highlighting the diverse ways tariffs can affect the economy.
• The CPI data will be closely monitored to assess how tariffs filter through the economy.

Pricing Strategies and Impact on Companies

• Companies face a choice between absorbing tariff costs in their margins or passing them on to consumers through price increases.
• The ability to pass on costs depends on the company's position and the availability of substitutes for consumers.
• Tech companies like Nvidia may have more pricing power to pass on costs, while consumer goods companies face greater competition and consumer choice.
• Automobile manufacturers, such as Ford, are experiencing significant cost increases due to tariffs ($800 million in the last quarter).
• The sustainability of absorbing these costs is questionable, as shareholders may not be willing to bear the burden indefinitely.
• The impact of tariffs will likely be idiosyncratic, varying significantly from company to company and industry to industry.

Economic Slowdown and Future Outlook

• The billions flowing into government coffers from tariffs ultimately come from companies and consumers in the US.
• This transfer of wealth is expected to contribute to a slowing in the economic growth rate.
• The market's reaction to tariffs may change after Labor Day, as the full impact becomes more apparent.
• The phrase "yesterday's price is not today's price," popularized by rapper Fat Joe, encapsulates the potential for prices to rise due to tariffs.
• The market outlook is characterized as "choppy sailing," with significant data releases expected in the coming months.
• Market participants will likely interpret data selectively, with bulls focusing on positive indicators and bears emphasizing negative ones.
• The third quarter will provide more reliable data, as the second quarter's positive results were partly due to lowered expectations in the first quarter.
• The "rubber hitting the road" will occur as the true impact of tariffs and other economic factors becomes clearer.

Conclusion

The market's initial positive reaction to tariffs is likely to be tempered by the eventual impact on companies and consumers. The ability of companies to absorb or pass on tariff costs will vary, leading to idiosyncratic effects across industries. An economic slowdown is anticipated as the billions collected from tariffs are ultimately borne by US businesses and consumers. The market outlook is uncertain, with significant data releases expected in the coming months that will shape investor sentiment.