Client Update, August 6, 2025: A Tariff Update

It’s been just over four months since Trump’s April 2 “Liberation Day” tariff announcements, and many observers have been surprised by the relatively mild economic fallout so far.

Back in April, headlines warned of empty store shelves within “a couple of weeks.” That didn’t happen. Even inflation has been more subdued in the first few months than many worried.

The effects might be beginning to appear. The most recent jobs data revisions were telling, as May and June numbers were sharply revised down. “What had previously looked like healthy gains… now appears to have been a much more anemic gain of under 20,000 jobs,” wrote Ben Casselman in The New York Times.

On the other hand, the unemployment rate itself only ticked up slightly (4.2% in July, up from 4.1% in June). That might add to the impression that perhaps the economy is withstanding tariffs better than feared. “Almost every major indicator… has been pretty steady since last fall,” Guy Berger of the labor-market think tank Burning Glass Institute told The Wall Street Journal.

But stability in fragile conditions isn’t the same as strength. “I would not bet a lot of money on things staying stable going forward,” Berger added. And we agree.

So why haven’t tariffs had a more immediate, stronger impact?

First, they haven’t been implemented as aggressively as initially announced. As we noted in our April and May letters, the administration was forced to blunt the initial rollout in response to market reaction. Many tariffs were softened as exemptions were introduced (e.g., Brazil's punitive tariffs followed by broad carve-outs). In other cases, some proposals were quietly delayed or shelved; one tracker notes Trump has reversed course 28 times on tariff plans.

Second, strong corporate balance sheets have created a buffer. Rick Rieder of investment company BlackRock recently argued in the Financial Times that the U.S. has become “one of the world’s most shock-resistant economies.” While we’re cautious about drawing overly broad conclusions out of ambiguous data, he's correct that American corporate balance sheets are generally strong, offering resiliency against shocks that wouldn’t be possible otherwise.

Third (and most importantly), these effects take time to materialize. Imposing billions in new costs on U.S. companies will inevitably have consequences, but the process plays out slowly. Consider Rock City Coffee in Maine, a small local roaster facing price increases due to the 50% tariffs on Brazilian coffee. They had initially tried to avoid passing the tariffs on to their customers but finally reached a breaking point. “Despite our efforts to absorb these rising costs,” the Rock City Employee Cooperative said in a published statement, “it has become unsustainable for us to do so, as coffee prices have hit 50-year highs.”

They’re not the only ones announcing price increases. At the opposite end of the corporate spectrum, Procter & Gamble (NYQ: PG), maker of a huge range of household goods, have also decided to start raising prices this month, after months of deliberation.

Unfortunately, Trump and his economic team seemingly do not understand the position in which they are placing American companies ranging from small, local cooperatives to multibillion dollar firms. They seem to persist in believing that tariffs are paid by foreign governments. In reality, American companies have basically only three possible choices:

1. absorb the cost of the tariffs themselves,

2. pass the costs along in the form of price increases, or

3. some combination of (a) and (b).

And that’s true of virtually all U.S. companies, no matter sector or size.

Consider auto manufacturer General Motors Co (NYQ: GM), which has chosen to try to absorb tariff costs rather than risk competitiveness and market share. But that decision comes at a price: a $1.1 billion hit last quarter, with projected losses of $4–5 billion in 2025. Less profit means less investment, fewer jobs, and slower growth. And GM isn’t alone: Ford Motor Co. (NYQ: F) paid $800 million in Q2; Stellantis (NYS: STLA), $350 million; even Tesla (NSQ: TSLA) paid $200 million.

Worse, the current tariff policy approach is actively disadvantaging many American companies. For example, GM imports most of its cars from South Korea and Mexico, which are facing 25% tariffs, plus it faces tariffs on the commodities side (e.g., steel). But then the Trump Administration imposed only 15% tariffs on Japan, to the (relative) benefit of brands like Toyota, Honda, Nissan, etc. Ford, meanwhile, despite onshoring production, has been effectively punished by tariffs because they rely heavily on internationally sourced parts and materials. “The automaker most reliant on U.S. manufacturing is among the hardest hit by tariffs,” The Wall Street Journal wrote of Ford’s experience with tariffs. The Trump Administration has reacted somewhat dismissively, describing Ford’s situation as idiosyncratic.

This isn’t strategic tariff policy. It’s reactive, inconsistent, and often counterproductive. Executives, bound by fiduciary and legal obligations, are reporting the same reality: they are the ones absorbing the cost, cutting profits, and raising prices, not foreign governments.

In fact, we cannot think of another time when the private sector and the President of the United States had fallen so out of sync in their understanding of economic policy and impact.

So why hasn’t the market reacted more sharply? Why are equity prices still strong?

Right now, it’s unclear whether equity and credit markets are responding rationally. There is a wisdom to the market, but there’s no doubt the market can be prone to bouts of over- or underpricing risk. (In fact, we depend on pockets of inefficiency when market price falls below inherent value in order to build our own portfolio.)

Whether the market is mispricing risk or simply betting on resilience, we remain cautious. Today’s economy is no 1999 bubble, but we do see signs of froth, especially in credit markets. In this context, selectivity becomes essential.

For our part, this uncertain environment underscores the importance of our disciplined approach. We invest with a margin of safety, focusing on companies with strong structural fundamentals that can perform across a wide range of economic conditions.

Here’s how that philosophy is reflected in some of our current holdings:

Amazon.com Inc. (NSQ: AMZN)

Amazon’s recent stock dip is out of step with its underlying business performance, given its very strong recent earnings report. In our view, the stock ran up heading into the earnings print, and then it got caught up on the negative tariff and jobs report headlines. As a result, it fell over 8% even as the company has continued to perform admirably well.

We remain confident. Amazon has a history of being conservative with its outlook and reliably thinking long-term when it comes to capital allocation. Our only possible comment is that capital expenditures are up quite a bit year-over-year (at $32.18 billion, much higher than analyst expectations of $26.36 billion, largely due to more data centers and AI infrastructure). However, in our view, Amazon has earned the right to flex this up or down as it sees fit.

Other key highlights:

Other metrics also show strength. Online store sales, at $61.4 billion, grew 11% from the prior year. Advertising revenue is at $14.99 billion and projected to rise 17%.

Regarding AWS, we’ve seen some negative headlines on the cloud growth number (17%) because it trailed Microsoft (NSQ: MSFT) and Google’s growth. With that said, it’s important to remember that Microsoft plus Google Cloud revenue is equal to AWS, so we are perhaps seeing a bit of the Law of Large Numbers at play rather than an erosion in the underlying brand.

In short, by almost every measure, Amazon has overperformed and continues to operate from a place of strength. In many ways, Amazon remains the case study in how well-run organizations can perform well in a wide variety of economic environments, not just when the economy is at its best.

Alphabet Inc. (NSQ: GOOGL)

Similarly, Google had another impressive quarter, and we are comfortable keeping GOOG at its Tier 1 weighting.

You may have seen some headlines suggesting that Google is losing its “iron grip” on search users. It’s difficult to credit these concerns, however, when Google’s search engine market share has barely budged in years. Ten years ago, in July 2015, Google’s market share was 90.94%. Today, as of July 2025, it’s 89.57%.

Even more importantly, search revenue has risen by 12%, partly due to higher use (more paid clicks) and pricing (higher price per click). In short, Google search is still a reliable earnings engine.

Simultaneously, its other ventures have also been performing well:

• Cloud Revenue and Backlog: up 32% and 38% respectively, and it confirmed on its earnings call that OpenAI has become a customer.

• YouTube: continues to impress and take market share in the broader streaming category. In fact, it has maintained the largest share of TV viewing among media companies for several months now (at 12.8%). Commensurately, YouTube’s Advertising revenue increased 13%, while subscription revenue increased 20%.

• Waymo: remains an emerging growth asset that adds to its autonomous capabilities and expands its robotaxis in additional cities, including SF, LA, Phoenix and now Austin and Atlanta. Waymo said earlier this year that its robotaxis had traveled 56.7 million miles without human supervision, almost certainly outpacing any possible competitor. The Waymo fleet totals 1,500 vehicles and over 250k rides per week.

• Other / Google Ventures: bets on private companies SpaceX (GOOG owns 6.5%) and Anthropic (14% ownership) have paid off well for shareholders based on each company’s most recent capital raise valuations.

Like Amazon, Google’s 2025 Capex guidance was raised an additional $10B (to $85B), but we are confident, based on historical returns, that the incremental spend will be justified. Google is another company that has earned our trust in this regard.

Novo Nordisk A/S (NYS: NVO)

Novo, one of our more recent acquisitions, has been having something of a trying year. It has been dealing with cheaper copycat versions (compounds) of its weight loss drug Wegovy, despite it being illegal. Supply shortages of “branded” weight loss products allows the temporary production of substitute (not FDA approved) compound alternatives, plus something of a “gray market” has emerged with the similar drugs (and outright counterfeits) being sourced directly from China. Although the temporary order was removed several months ago, the new “illegal” supply hasn’t left the market. NVO estimates 1M patients in the U.S. are still using such compounds. The company is pursuing litigation, more enforcement from regulators, etc.

But the net result has been to temper expectations for company performance. At the end of July, Novo lowered 2025 sales growth guidance to 8-14% (from 13-21%) and Operating Profit growth to 10-16% (from 16-24%).

This makes the second guidance revision in just a few months, which is indicative of a business still trying to find its footing. Altogether, its stock is down almost 70% from its past highs.

Our view: extreme optimism has been replaced with extreme pessimism.

The latest bad news clearly caught investors by surprise, as did the promotion of a new “insider” CEO (Maziar Mike Doustdar, who has over 30 years with the company). We have a sense that some dismay with the company is coming from investors who had been hoping for a total reset with an “outsider” CEO. Hence Novo’s devaluation.

However, in our view, it is now set up for success just as it was set up for failure as it was hitting all-time highs last summer. The core GLP-1 business has morphed into a duopoly with Eli Lilly, and the next generation of products are quickly moving forward in the FDA approval process. Furthermore, with the recent acquisition of Catalent manufacturing sites for $11.7B, meeting future demand won’t be an issue in the next product cycle. At current prices, investors are giving no value to NVO’s pipeline beyond diabetes and obesity (e.g. cardiovascular, Alzheimer’s, etc.). Based on the most recent investor call, we expect new management to prioritize commercial execution and right-size its cost structure, which was overbuilt based on “yesterday’s” rapid growth.

In short, we see no reason at this point to revise our previous evaluation of NVO’s inherent and underlying strengths in the market.

Ultimately, with NVO, as with all our holdings current and future, our focus remains wholly on identifying companies with enduring competitive advantages, solid balance sheets, and disciplined management teams. We only initiate or expand positions when market prices fall meaningfully below our estimate of long-term intrinsic value.

Tariff policy, political uncertainty, and global volatility may create near-term noise, but they also create opportunities for those willing to do the work, stay patient, and invest with discipline. That is what we remain committed to doing on your behalf.

With warm regards,

Glenn