US Companies Are Absorbing Tariff Inflation

Inflation was in the spotlight last week as commentators sought evidence of tariff impacts and an indication of future interest rate policy in the latest data. But producer price inflation was benign, falling to 2.6% over the last year from 3.1% the previous month. This decline in headline PPI primarily reflects a decline in trade margins, as wholesalers and retailers absorb inflation from tariffs by reducing their profit margins rather than passing these costs onto consumers.

This stands in sharp contrast to the postpandemic period when these companies sought to boost their margins under the cover of broader inflationary pressures. This more cautious approach may indicate a lack of confidence in the strength of the US businesses to withstand higher prices. Although consumer price inflation remains above target, it was in line with expectations and consequently reinforced expectations of forthcoming interest rate cuts. In response, the US dollar fell on Thursday, ending the week down 0.3%.

Long-Term Treasury Yields Fall

Within the Treasury markets, the most notable move came from the 30-year yield, traditionally seen as a measure of financial stability, which fell to its lowest level since the announcement of the tariffs in early April. The show of confidence among investors coincided with news that the Supreme Court will fast-track a judgment on the authority of President Donald Trump to use emergency powers to impose tariffs.

Tariffs Show Investors Have Short Memories

While the judgment of the Supreme Court is unknown, the waning impact of tariffs in the minds of investors can be seen from the performance of Morningstar’s tariff exposure basket, an unweighted collection of companies identified by our analysts as being especially vulnerable to tariffs. Having fallen on average 22% from the start of the year to April 8 when we launched the basket, the price of these companies has subsequently risen by an average of 25% with several up over 100% including Wayfair W, Kohl’s KSS and Western Digital WDC.

This is a reminder of how quickly important economic and geopolitical events can fade in the minds of investors, even while the outlook is still uncertain. Similar insouciance in the face of political and economic uncertainty was also evident in French stocks, which rose 1.8% in a week when the country welcomed its sixth prime minister in five years. It would be easy to interpret these outcomes as evidence that investors are becoming more comfortable with political uncertainty. However, such a conclusion must be tested through the next significant crisis before we could have any confidence in that argument.

Oracle Stock Price Soars

Technology investors had plenty of news to digest last week, with several capital raisings including the IPO of Klarna, new products from Apple AAPL and eye-popping results from Oracle ORCL. Oracle’s impressive growth triggered a 42% increase in its stock price on Wednesday, briefly making founder Larry Ellison the world’s richest man and helping the information technology sector to a 2.8% gain over the week. It also prompted a change in Morningstar analyst Luke Yang’s assessment of Oracle’s fair value estimate. Apple, in contrast, failed to impress investors, a dangerous outcome for a company trading at an expensive valuation. Technology gains also drove the consumer discretionary sector 1.3% higher as Tesla TSLA rose 12.8% on the announcement that it has gained approval to test its robotaxi in Nevada.

More broadly, sharp gains in utilities, energy and financial services led to an overall rise of 1.5% in the Morningstar US Market Index. Further afield, developed overseas markets generally lagged the US while emerging markets were ahead, up 3.6%, led by China.

A Half-Point Rate Cut Would Boost Markets

The focus of commentators this week will be firmly fixed on the Federal Open Market Committee decision on Wednesday and the press conference that follows. While a quarter-point cut to interest rates is the most likely outcome, impatient investors will be hoping for more, in the belief that lower interest rates will boost economic growth and equity valuations. Although stock prices are likely to move higher if these hopes are realized—or if Chairman Powell hints at deeper cuts in his comments—increasing the likelihood of inflation will not benefit most investors over the longer term. As ever, investors can keep track of economic announcements on this calendar.