In short
Tariffs are rising but haven’t shown up much in economic data/earnings yet; the speaker argues the impact is about to hit in Q3 2025, especially Aug–Sep, and will affect inflation and credit quality.
Guest backgrounds
Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Mentions colleague Jenna Giannelli (discussed retail last week); no further background provided.
Key claims
U.S. core inflation is picking up due to tariff-sensitive sectors; Q2 earnings likely fine, but Q3 earnings at risk. Tariff rates rose to ~9% and could effectively double to ~15–20%. Tariff collections jumped (>$26B in June, ~1% of GDP annualized). Pauses/exemptions delayed effects, but delays are ending. Firms front-loaded inventory, reducing near-term impact; by Q3 they’ve sold it, so new inventory raises COGS.
Notable examples
socks ordered before tariffs; August–September core inflation focus; retail credit caution.
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Chapters
Tap a time to open that second in VOUnderstanding the Current Tariff Landscape
0:45 to 1:41
Discussion on the significance of tariffs and their upcoming impact on economic data.
“My colleague Jenna Giannelli and I discussed some of the reasons why on last week's episode focused on the retail sector, but what I want to do next is give a little bit of that a broader context.”
Factors Influencing Tariff Impact
1:41 to 2:55
Exploration of factors affecting the timing and magnitude of tariff impacts.
“The first factor is that tariff rates are increasing rapidly.”
Future Implications for the Market
2:55 to 3:47
Insights on how upcoming tariff impacts may affect credit and retail sectors.
“But by the third quarter, we think they've sold a lot of that inventory, meaning they no longer get the benefit.”
Transcript
Automatic transcript. May contain errors.0:00Andrew Sheets:Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Today, I'm going to talk about why tariffs are showing up everywhere but the data, and why we think this changes this quarter. It's Wednesday, July 16th at 2 p.m. in London. Investors have faced tariff headlines since at least February. The fact that it's now mid-July and markets are still grinding higher is driving some understandable skepticism that they're going to have their promised impact. Indeed, we imagine that maybe more of one of you is groaning and saying, what? Another tariff episode?
0:37Andrew Sheets:But we do think this theme remains important for markets. And above all, it's a factor that we think is going to hit very soon. We think it's kind of now, the third quarter, when the promised impact of tariffs on economic data and earnings really start to come through. My colleague Jenna Giannelli and I discussed some of the reasons why on last week's episode focused on the retail sector, but what I want to do next is give a little bit of that a broader context. Where I want to start is that it's really about tariff impact picking up right about now. The inflation readings that we got earlier this week started to show U.S.
1:16Andrew Sheets:core inflation picking up again, driven by more tariff-sensitive sectors. And while second-quarter earnings that are being reported right about now we think will generally be fine and maybe even a bit better than expected, the third-quarter earnings that are going to be generated over the next several months, we think those are more at risk from tariff-related impact. And again, this could be especially pronounced in the consumer and retail sector. So why have tariffs not mattered so much so far, and why would that change very soon? The first factor is that tariff rates are increasing rapidly.
1:51Andrew Sheets:They've moved up quickly to a historically high 9 % as of today, even with all of the pauses and delays. And recently announced actions by the U.S. administration over just the last couple of weeks could effectively double this rate again, from 9 % to somewhere between 15 % to 20%. A second reason why this is picking up now is that tariff collections are picking up now. U.S. Customs collected over$26 billion in tariffs in June, which annualizes out to about 1 % of GDP, a very large number. These collections were not nearly as high just three months ago. Third, tariffs have seen pauses and delayed starts, which would delay the impact.
2:34Andrew Sheets:And tariffs also exempted goods that were in transit, which can be significant from goods coming from Europe or Asia, again a factor that would delay the impact. But these delays are starting to come to fruition, as those higher tariff collections and higher tariff rates would suggest. And finally, companies did see tariffs coming and tried to mitigate them. They ordered a lot of inventory ahead of tariff rates coming into effect. But by the third quarter, we think they've sold a lot of that inventory, meaning they no longer get the benefit. Companies ordered a lot of socks before tariffs went into effect.
3:07Andrew Sheets:But by the third quarter and those third quarter earnings, we think they will have sold them all. And the new socks they're ordering, well, they come with a higher cost of goods sold. In short, we think it's reasonable to expect that the bulk of the impact of tariffs and economic and earnings data still lies ahead. Especially in this quarter, the third quarter of 2025. We continue to think that it's probably in August and September, rather than June-July, where the market will care more about these challenges as core inflation data continues to pick up. For credit, this leaves us with an up in quality bias, especially as we move through that August-September period.
3:46Andrew Sheets:And as Jenna and I discussed last week, we are especially cautious on the retail credit sector, which we think is more exposed to these various factors converging in the third quarter. Thank you, as always, for your time. If you find Thoughts of the Market useful, let us know by leaving a review wherever you listen. And also tell a friend or colleague about us today. The preceding content is informational only and based on information available when created. It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for you.
From the publisher
U.S. tariffs have had limited impact so far on inflation and corporate earnings. Our Head of Corporate Credit Research Andrew Sheets explains why – and when – that might change.
Read more insights from Morgan Stanley.
----- Transcript -----
Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley.
Today I'm going to talk about why tariffs are showing up everywhere – but the data; and why we think this changes this quarter.
It's Wednesday, July 16th at 2pm in London.
Investors have faced tariff headlines since at least February. The fact that it's now mid-July and markets are still grinding higher is driving some understandable skepticism that they're going to have their promised impact. Indeed, we imagine that maybe more of one of you is groaning and saying, ‘What? Another tariff episode?’
But we do think this theme remains important for markets. And above all, it's a factor we think is going to hit very soon. We think it's kind of now – the third quarter – when the promised impact of tariffs on economic data and earnings really start to come through.
My colleague Jenna Giannelli and I discussed some of the reasons why, on last week's episode focused on the retail sector. But what I want to do next is give a little bit of that a broader context.
Where I want to start is that it's really about tariff impact picking up right about now. The inflation readings that we got earlier this week started to show US core inflation picking up again, driven by more tariff sensitive sectors. And while second quarter earnings that are being reported right about now, we think will generally be fine, and maybe even a bit better than expected; the third quarter earnings that are going to be generated over the next several months, we think those are more at risk from tariff related impact. And again, this could be especially pronounced in the consumer and retail sector.
So why have tariffs not mattered so much so far, and why would that change very soon? The first factor is that tariff rates are increasing rapidly. They've moved up quickly to a historically high 9 percent as of today; even with all of the pauses and delays. And recently announced actions by the US administration over just the last couple of weeks could effectively double this rate again -- from 9 percent to somewhere between 15 to 20 percent.
A second reason why this is picking up now is that tariff collections are picking up now. US Customs collected over $26 billion in tariffs in June, which annualizes out to about 1 percent of GDP, a very large number. These collections were not nearly as high just three months ago.
Third, tariffs have seen pauses and delayed starts, which would delay the impact. And tariffs also exempted goods that were in transit, which can be significant from goods coming from Europe or Asia; again, a factor that would delay the impact. But these delays are starting to come to fruition as those higher tariff collections and higher tariff rates would suggest.
And finally, companies did see tariffs coming and tried to mitigate them. They ordered a lot of inventory ahead of tariff rates coming into effect. But by the third quarter, we think they've sold a lot of that inventory, meaning they no longer get the benefit. Companies ordered a lot of socks before tariffs went into effect. But by the third quarter and those third quarter earnings, we think they will have sold them all. And the new socks they're ordering, well, they come with a higher cost of goods sold.
In short, we think it's reasonable to expect that the bulk of the impact of tariffs and economic and earnings data still lies ahead, especially in this quarter – the third quarter of 2025. We continue to think that it's probably in August and September rather than June-July, where the market will care more about these challenges as core inflation data continues to pick up.
For credit, this leaves us with an up in quality bias, especially as we move through that August to September period. And as Jenna and I discussed last week, we are especially cautious on the retail credit sector, which we think is more exposed to these various factors converging in the third quarter.
Thank you as always for your time. If you find Thoughts on the Market useful, let us know by leaving a review wherever you listen; and also tell a friend or colleague about us today.