RBC warns it's still 'too early' to say tariffs won’t generate higher inflation

RBC Capital Markets strategists warn that despite companies largely managing tariffs in Q2 2025, the full inflationary impact is expected to manifest in the second half of 2025 and early 2026. They note that firms anticipate tariff-related cost effects and pricing changes to emerge later this year, potentially coinciding with typical seasonal weakness in U.S. equity markets.

Analysis

According to a research note from RBC Capital Markets, the full inflationary impact of tariffs has yet to be priced in by the market, despite companies reporting effective management during the Q2 2025 earnings season. Strategists led by Lori Calvasina caution that the real test will come in the second half of 2025 and potentially early 2026, a sentiment echoed in earnings commentary from firms like Otis, Genuine Parts Co, Deckers, and Tractor Supply. These companies have indicated that tariff-related cost effects and subsequent pricing adjustments are expected to materialize more significantly later in the year. The report highlights that mitigation strategies are not uniformly successful across all companies and notes specific concerns from consumer-facing businesses, such as O'Reilly Automotive, about potential negative consumer reactions to price increases. This anticipated pressure from tariffs could coincide with a period of typical seasonal weakness for U.S. equity markets in the fall, suggesting a confluence of headwinds.

Key Decisions for Investors

• Investors should critically re-evaluate company guidance for the second half of 2025, particularly for consumer and industrial firms, as the current resilience to tariffs may not persist.
• Monitor company gross margins and inflation indicators closely in the coming months for early signs of tariff-related cost pressures impacting profitability.
• Consider adjusting portfolio exposure to account for potential headwinds in the fall, as the article suggests tariff impacts may align with a period of seasonal market weakness.
• Scrutinize companies' supply chain vulnerabilities and mitigation strategies, as the ability to manage rising tariff costs is expected to be a key performance differentiator.