Investors and CEOs have completely ditched the idea that tariffs will cause a recession
Are tariffs a “boiling frog” process... or is this water really just lukewarm?
Executives at America’s leading companies, and the Wall Street analysts who hang on to their every word, are still talking about tariffs. A ton.
But there’s no longer the belief that levies on imports mean recession is a surefire bet.
While mentions of “recession” and related terms in S&P 500 companies’ quarterly earnings calls have dropped precipitously to their lowest level since 2005, references to tariffs (while down) remain extremely high relative to history.
That comports with the results of a survey released last week from Conference Board showing the share of respondents expecting a US recession in the next 12 to 18 months falling to 36% in Q3 after spiking to 83% in Q2. Compare that to late May through June, when the market was saying that tariffs were a solved problem, but CFOs certainly weren’t.
Fund managers surveyed by Bank of America are singing a similar tune. While a trade war triggering a global recession remains the biggest tail risk, with 29% deeming it as such, that share is down substantially from 80% in its April survey. That’s despite expectations for the average US tariff rate steadily rising from 12% in June to 15% as of the August survey, largely tracking the evolution of approximate effective tariff rates.
Tariffs are a known known, and judged to be a manageable risk by the C-suite and market participants. Look no further than the July CPI inflation report, released on Tuesday: a gentle but unsurprising pickup in core inflation was treated as a threat to real growth that the Federal Reserve will offset by lowering interest rates.
And that may be in large part because tariffs, to this point, have not been a dominant feature of either the aggregate earnings or economic backdrops.
S&P 500 12-month forward earnings-per-share estimates are at an all-time high, thanks in large part to the enhanced profitability of US megacap tech companies, most of which are highly levered to the AI boom. The notion that “AI is eating the economy as well as the stock market — and deservedly so!” goes a long way in explaining much of the strong performance of the stock market.
There are undoubtedly distributional impacts here: winners and losers. For every 3M that’s been able to brace itself for tariffs and adjust accordingly — managing to have guidance above where it was before tariffs — there’s at least one Under Armour that’s still collapsing under their weight.
That’s what I thought too. So I went and took a look. Not sure what to make of it yet. 🤷🏻♂️ https://t.co/7fdWJyuvhC
— Steve Hou (@stevehou0) August 12, 2025
The fingerprints of tariffs are all over many relative price changes underneath the hood as well as specific pockets of price pressures.
“It seems clear that the breadth of increases has ratcheted higher in recent months, with a wider swath of core goods items being impacted due to higher tariffs,” Omair Sharif, president of Inflation Insights, wrote. “I think the breadth of gains and recent jump in prices through July remain indicative of ongoing tariff pass-through that we should continue to expect will boost core inflation in the coming months.”
But tariffs are not yet playing the starring role in defining the totality of the average American’s inflation experience. They’ve been offset or outweighed by other factors, like tumbling energy prices and the deceleration in inflation tied to the cost of housing.
“The bottom line [is] the inflation story is playing out slowly, which could mean tariff passthrough is delayed or that tariff passthrough will ultimately be less than many analysts expect,” Dennis DeBusschere, chief market strategist at 22V Research, wrote. “Our call is a slow tariff passthrough of inflation with high conviction, with economic growth remaining relatively firm.”
Corporate America’s ability to adapt is another factor preventing tariffs from creating an obviously large hole in activity or the stock market.
Michael Feroli, chief US economist at JPMorgan, observed that paid tariffs on imports (or in his terms, “dynamic rates”) have gone up about 25% less than if the mix of imports by country and product had remained unchanged relative to last year (or “static rates”).
“Because it takes time for importers to switch suppliers, the dynamic tariff rate may continue to evolve in response to further changes in import shares,” he wrote, but cautioned that “this likely overstates the degree to which importers have been able to hold down costs, since the firms switching suppliers have likely seen higher pre-tariff prices, in addition to dealing with switching costs.”
To be sure, employment growth has slowed meaningfully in recent months, and sectors like manufacturing or wholesale trade certainly aren’t being helped by trade barriers. But it’s tough to disentangle the effect that lower net immigration has on headline job growth from tariff-centric demand dynamics as of yet. The unemployment rate, admittedly an imperfect summary metric for the health of the labor market, is in the same place it was a year ago, at 4.2%.
This may all change going forward, but it’s useful to try to drill down into why tariff announcements that brought the S&P 500 to the verge of a bear market in April haven’t produced anything nearly as dire as feared.
The third quarter of 2022 was arguably the point at which markets (and the Federal Reserve) really woke up to the extent of inflation issues and what might be needed to “cure” it, best reflected by Fed Chair Jay Powell’s speech at Jackson Hole, where he succinctly warned of “some pain to households and businesses” amid the central bank’s rate-hiking campaign to bring price pressures to heel.
The third quarter of 2025 may serve as a similar alarm bell regarding the “real growth” side of the US economy.
As more and more post-tariff imported inventory goes up on the shelves and companies look to push prices higher to protect margins (which many, including Procter & Gamble, have signaled is in the offing), consumers may not be able to grapple with higher prices. The lackluster performance of consumer spending year to date is not encouraging for those hoping that any losses in volume will be easily made up for by increases in price.
But there’s also the potential outcome that the fear around these tariffs was worse than the experience of actually living with them.
“After a soft first half of the year, July Bank of America card spending per household rose by a solid 0.6% month-over-month (m/m) on a seasonally adjusted (SA) basis,” wrote Bank of America analysts led by Aditya Bhave. “This supports our view that the consumer could be gaining steam, after a soft patch in 1H due to tariff uncertainty and immigration policy.”
We’ll get more clarity as the data and corporate updates unfold over the coming months, with July’s reading of the producer price data due on Thursday and retail sales on Friday.
Until then, the question remains: are tariffs a “boiling frog” process... or is this water really just lukewarm?
