Tariffs weigh on quarterly earnings, trigger market volatility

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Polaris entered the boating industry in May when it purchased four boat brands, including pontoon builder Bennington.

Polaris entered the boating industry in May when it purchased four boat brands, including pontoon builder Bennington.

Tariffs have been a recurring theme in quarterly earnings reports, and despite some companies showing growth for the quarter, investors seem to be responding to the uncertainty of the United States being engaged in a trade war.

The stock market responded to announcements of tepid results and forecasts by companies in the industrial sector, as the Dow Jones plummeted almost 550 points on Tuesday before nearly completely rebounding in the final hours of trading for the day, according to The Wall Street Journal. The newspaper called the volatility “stock market whiplash.”

Caterpillar warned dealers that it would have to raise prices because of the increasing cost of steel, according to The Washington Post. Analysts asked Caterpillar CEO Jim Umpleby questions about tariffs during Tuesday’s conference call to discuss earnings, trying to get a sense of how much prices would rise and on which products.

“With regard to the 1 to 4 percent [price increase], we’re not going to break it down by segments, but basically it depends geographically and on the business segment,” Umpleby said.

Caterpillar hasn’t shifted production to countries where the tariffs wouldn’t apply, he said. “But just to expand on that, we have a global footprint. … We manufacture products in Asia, in the Americas, in EAME, so that does help us mitigate this somewhat because we do have a global manufacturing base,” Umpleby said.

Though retail sales were at the low end of expectations for Polaris, all other income statement metrics beat expectations, according to Gerrick Johnson, an analyst with BMO Capital Markets. Still, Polaris shares remain under pressure as a direct result of tariff uncertainty.

“With a lack of guidance on a 2019 impact, we think investors may be assuming the worst,” Johnson said about Polaris. “Until the company can prove otherwise, the perceived worst-case scenario could continue to weigh on shares.”

BMO Capital reduced its 2019 earnings estimate because tariffs could cost Polaris $130 million, on a gross basis, for the fiscal year, Johnson said.

“While the net impact will likely be significantly less, we are taking a conservative approach and have adjusted our earnings estimates appropriately,” he said.

Although earnings growth is high at 22 percent so far this quarter, the amount by which S&P 500 index companies are beating analyst estimates is nearly half of what it was during the first quarter, according The Wall Street Journal.

That slow growth is wearing on investors and making bonds more attractive, with rising interest rates.

“These trade tensions are coming home to roost, and they are impacting the fundamentals of the market,” Tally Leger, equity strategist at OppenheimerFunds, told WSJ. “Thanks to trade tariffs, we are facing the headwinds of a stronger dollar, higher oil prices and rising interest rates.”

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