Tariff Angst Resurfaces Ahead of Earnings From Industrial Giants

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(Bloomberg) — Makers of power equipment, heavy machinery and air conditioners have been among the big winners in the US stock market this year, but renewed tariff concerns put them at risk of stumbling as earnings season gets underway.

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Though easing tensions in the Middle East powered industrial stocks to gains last week along with the broader market, the advance belied intense volatility under the surface. Fastenal Co. slid last Monday after the industrial distributor said tariffs had squeezed margins, and there was widespread selling on Wednesday after Canadian maker of recreational vehicles BRP Inc. detailed the way changes to US duties on metals would increase input costs.

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It’s a stark resurgence of fears about tariffs that caused repeated selloffs last year before fading into the background. With high-profile names such as heavy-machinery giant Caterpillar Inc. and electrical equipment firm Vertiv Holdings Co. due to report results in the weeks ahead, investors are once again focused on how President Donald Trump’s trade policy will impact bottom lines.

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“There’s a real possibility that people kind of forgot about tariffs” as the war in Iran raged, said Scott Ladner, chief investment officer at Horizon Investments. “We’re going to start to learn about what it really means, in real life, for each of these individual companies, and I think there is a real fear that it could be worse in some cases.”

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Hedge funds were net sellers of the industrial sector in 10 of the last 12 weeks, according to Goldman Sachs’ prime brokerage desk. It is among the most net sold sectors both this month and so far this year, according to data through April 16.

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The sector’s outlook is also cloudy because the Iran war will weigh on economic growth this year, even if disruptions to energy supply end soon, Ladner said. The S&P 500 Industrials Index gained 1.8% on Friday, but the group has yet to fully recover from losses suffered in the month after the outbreak of the war in late February.

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Heavyweights such as Caterpillar and Deere & Co. were lower premarket on Monday after new disruptions to shipping in the Middle East over the weekend.

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Still, overall this year, the sector is performing well, holding onto a 12% gain, compared with the 4.1% advance in the broader S&P 500 as of Friday’s close. That outperformance came on the heels of investors piling into stocks such as Caterpillar and shipper FedEx Corp. in January and February on hopes for a strong US economy.

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“I’m kind of cautious on this group, because it’s had such a big run and valuations have stretched out,” said Jed Ellerbroek, portfolio manager at Argent Capital Management. “I think that you just see in the stock reactions — those stocks are a little heavy now.”

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Last week, Fastenal dropped 6.9% on Monday, the most in six months, after the bellwether for the broader sector said it hadn’t raised prices fast enough to offset tariff costs. BRP’s US shares plummeted a record 35% on Wednesday after it pulled financial guidance and said metals tariff changes would cost C$500 million (about $365 million) this year. That kicked off a drop in names as varied as Caterpillar, power-tool maker Stanley Black & Decker Inc. and HVAC company Carrier Global Corp.