US Autos: a bottom-up view of tariffs and the macro

Thus far in 2025, the prevailing and overriding topic of conversation amongst economists and market participants has been tariffs and what they might mean for the global macro outlook. Not surprisingly, as we wrap up first quarter earnings season, tariffs have also emerged as the primary focus of CEOs and management teams of US corporates at the micro level. According to Goldman Sachs, tariffs were mentioned on 89% of US earnings calls this season. While implications for the macro outlook are highly topical, we also take a bottom-up view of tariffs at the micro US corporate level to glean insights into what broader implications they may have.

Specifically, we take a closer look at the US Autos sector which has been at the forefront of the tariff conversation. The Autos sector carries significant importance, both economically and politically, as one of the largest manufacturing industries that drives both growth and jobs in the US. Delving deeper into commentary from the likes of GM, Ford, and other auto industry participants, we catch a glimpse of the impact tariffs are having at the corporate level in areas such as earnings and margins, cost inflation and pricing. In doing this, we aim at assessing what tariffs may mean for end US consumers, credit quality, the default outlook, inflation, and the Fed policy path going forward, amongst other areas of consideration.

At their earnings call, GM announced that tariffs would have a $4-$5bn negative impact on operating earnings for the remaining nine months of the year. With its earnings release, Ford disclosed a full-year adverse tariff cost impact of $2.5bn. To put this into context, GM’s $6bn run-rate, annualised tariff impact represents ~3.3% of pre-announcement consensus revenue estimates for the year. As a result, GM management lowered its 2025 EBIT guidance by $3.5bn to $11.3bn for the year, and the outlook for implied operating margins was lowered ~1.9% to 6.3% for 2025.  Similarly, Ford’s management noted expectations for tariffs to be a material headwind for 2025 – its $2.5bn tariff cost estimate represents ~1.5% of expected 2025 sales. Even though they mentioned some offsetting cost “recovery” actions, tariffs are still expected to adversely impact operating earnings and margins.  Expectations for 2025 EBIT were lowered by an implied $1.5bn to $6.3bn, and in turn, the outlook for operating margins was lowered by 0.8% to 3.7% for 2025.
              
From a strategic operations standpoint, both GM and Ford provided insightful commentary on plans to offset tariff cost inflation with price-increase initiatives. Earlier in the year, GM had provided expectations for 2025 autos pricing to be lower by about 1%-1.5%. Post-tariffs, management noted implied pricing would be adjusted a net 2% higher from previous estimates. Similarly, Ford came into the year expecting “price moderation” for its cars of minus 2% for the year. Post-tariffs, Ford management adjusted pricing expectations higher by 3.3% to +1%-1.5% on a year-on-year basis. If we look at the US Consumer Price Index (CPI) basket, “New Vehicles” account for 4.3% while “Used Vehicles” represent 2.4%. While in isolation, a delta to previous expectations in the 2% to 3% area does not seem like much, if there is evidence of similar impacts in the rest of the basket then pressure can quickly start building up.

Another interesting discussion is how the tariff impact is likely to be absorbed in the supply chain. Consumers (and GDP calculations) only get to see the final product, but there are hundreds of suppliers involved in the making of a vehicle. Auto parts manufacturers tend to be smaller and have lower ratings than the likes of Ford and GM. They also have a more concentrated client base as the number of OEMs is limited (Original Equipment Manufacturers - GM, Ford, Stellantis, VW, etc.).  Although these features make it sound like they will be in a worse position than OEMs when it comes to swallowing these extra costs, the reality is a bit different. American Axle reported results earlier this month and their downward adjustments to guidance were not as bad as feared. EBITDA guidance was revised lower by 3%. They stated that 90% of AXL’s North America production is USMCA (United States-Mexico-Canada Agreement) compliant and not subject to tariffs. Close to 3% of 2024 revenues comes from imported products from Mexico/Canada – however, mostly all of these imports are USMCA-compliant. They also disclosed that steel and aluminium for North American production is all sourced locally in the US. Importantly, American Axle management noted they plan on passing on tariff costs to the OEMs based on conversations they have had with their large OEM counterparties.

Beyond the macro impact, details are emerging from a bottom-up perspective on how tariffs are impacting the outlook for corporates. To state the obvious, the outlook is clouded by a high degree of uncertainty on how things will play out, which in itself hurts growth. In our case example above, it is obvious that the auto sector is not having a great 2025 - which has consequences for earnings and profitably, and growth investment plans, as well as the outlook for net job creation at the corporate front lines.

Stepping back, the big-picture debate continues as to whether tariffs represent a “one-time” adjustment higher in prices that may be “transitory”. In addition, there are varying views on what tariffs will mean for the growth landscape. Earlier this month, Fed Chair, Jerome Powell, conveyed a “wait-and-see” approach to the macro outlook and monetary policy – he emphasised a “data-dependent” stance that we expect will further take form as the incoming hard data on tariffs rolls in. We recognise that these are still “early days” and uncertainty is highly-elevated. From a positioning standpoint, we remain prepared for a wide range of outcomes and varying scenarios as we navigate the road ahead. We favour balanced portfolios in fixed income with an “up-in-quality” bias that provides a handsome level of income while not taking excess risks at this juncture. Luckily for income seekers, yields remain very attractive indeed.