March 11, 2025
With the backdrop of a resilient and expanding economy, coupled with prospects for pro-business tax and regulatory policies, the market entered 2025 with positive momentum, reaching a peak in February. Over the last week, sentiment has quickly shifted as uncertainty surrounding tariffs and negative revisions to corporate earnings estimates have led to market declines. From the highs, stock prices have declined to the lowest levels since September.
| Index | Nov 5, 2024 Close | Feb 19, 2025 Peak | Mar 10, 2025 Close | % Change from Peak |
|---|---|---|---|---|
| S&P 500 | 5,782.76 | 6,144.15 | 5,614.56 | -8.6% |
WHAT CHANGED
| Investor Outlook Entering 2025 | Today’s Reality |
|---|---|
| The Federal Reserve will continue to reduce short-term interest rates as inflation cooled. | Inflation remains stubborn near 3% and the Federal Reserve rate reductions are on hold. |
| Corporate earnings were poised to increase mid-teens. | Analysts are revising earnings estimates down as weak outlooks on fourth-quarter calls and the impact of tariffs takes hold. |
| New administration policies of low taxes and less regulation ignite business growth. | New administration’s implementation of tariffs is expected to slow economic growth. Work by the Tax Foundation in Washington, DC, suggests a 1% decrease in GDP growth. |
A COMPANY-LEVEL VIEW
Fenimore is dedicated to identifying select, quality businesses that we believe can grow and produce attractive returns over time – businesses that can withstand the inevitable bumps of economic cycles and policy changes.
As our businesses reported earnings, most of the calls with management were dominated by questions about tariffs. As specific timing over the implementation of tariffs has been elusive, there were few definitive answers. Most management teams reassured investors that they could employ strategies similar to those used during the last major wave of tariffs. Broadly, there are three key approaches companies are using to mitigate the impact of tariffs:
- Diversify sourcing strategies. In response to tariff increases during the Trump administration’s first term, many companies proactively restructured their supply chains to mitigate geopolitical risk. This shift was further expedited during the pandemic as businesses sought greater resilience. Floor and Décor (FND) exemplifies this transition—having sourced 50% of its products from China in 2018, the company successfully reduced that figure to just 16% by the fourth quarter of 2024.
- Leverage supplier negotiations. Companies with strong competitive advantages and dominant market positions may have the bargaining power to compel suppliers to absorb a portion of the increased costs, thereby cushioning the impact of tariffs.
- Adjust pricing strategies. Several management teams have indicated that price increases could serve as a direct offset to higher costs. However, the extent to which this strategy will be adopted—and whether it could contribute to inflation—remains uncertain.
IMPACT ON EARNINGS PER SHARE
If left unaddressed, tariffs may pose headwinds to corporate earnings. Among the earnings calls we’ve participated in, Zebra Technologies Corporation (ZBRA) was the only company to provide a precise dollar impact estimate. Without mitigation, they anticipate a $60 million hit to profits in 2025. However, after implementing various countermeasures—including the aforementioned strategies—they project the net impact will be reduced to $20 million, or approximately 2% of pre-tax profits.
On a broader scale, a recent J.P. Morgan report estimated that the implementation of the proposed tariffs could lower S&P 500 earnings per share (EPS) by approximately $16, representing a 6% reduction from current projections. If accurate and without further mitigation efforts, this adjustment would curb the index’s expected double-digit earnings growth to approximately 5%.
* Source: J.P. Morgan Equity Strategy & Quantitative Research, Factset
LOOKING AHEAD: Changing Times. Unchanging Principles.
We stick to our plan: only owning companies we understand deeply, with what we believe to be solid competitive advantages, profitability, and strong leadership. Our Research team remains busy and diligent with earnings calls, talking with management teams, and traveling for face-to-face meetings. We recognize it’s a fast-moving environment with a lot of change. We will provide an update in our next quarterly letters, going out in early April.
At Fenimore, we remain dedicated to the principles and philosophy that have seen us through many market cycles over the past 50+ years.
STAY CONNECTED
If you have any questions, please reach out to us. Call 800-721-5391, email us at info@fenimoreasset.com, or stop by either our Albany or Cobleskill location.
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