In our October 2024 article, we joined the global raising of eyebrows as Warren Buffett’s Berkshire Hathaway quietly continued to reduce its holdings in tech giants like Apple, Amazon, and Microsoft. But perhaps most surprising was the measured sell-off of its substantial stake in Bank of America, long considered a cornerstone of Berkshire’s long-term strategy.

At the time, speculation swirled: Was this a signal of an approaching global recession? After all, moves of that scale from an investor of this calibre rarely lack calculated intent. Yet, the picture has since become clearer with the benefit of hindsight and in light of recent US political shifts and tightening trade policy. So, let’s talk about tariffs—those seemingly technical tools capable of sending ripples, shockwaves, or even tsunamis through global markets.

What Changed?

Since the new US administration assumed the position, a surge of economic protectionism through tariffs has taken root. Tariffs protect domestic industries, reduce trade deficits, and reclaim leverage in global trade negotiations.

In retrospect, it’s more than likely that tariffs were on the incoming political agenda all along—and may have been the driving force behind Berkshire’s strategic reshuffling. Why? Because tariffs impact more than just goods, hence the urging of a swift trade tension resolution by IMF chief Kristalina Georgieva. They affect confidence, compress margins, and threaten long-term profitability. Let’s unpack that briefly.

Confidence is Crucial

Investors, consumers and businesses display their trust in market stability and predictability through their economic participation, respectively, by investing, spending and expanding. This confidence fuels liquidity, economic growth and market efficiency. Conversely, uncertainty leads to reduced economic activity, market volatility, and, most likely, economic downturns. The latter implies a recessionary period of a declining GDP, growing unemployment and slowed-down consumer spending lasting for two or more consecutive quarters.  

Margins Matter

Tariff-squeezed Profit Margins

The term ‘margin’ implies the difference between the cost of producing or acquiring a good and its selling price.  As we know, a tariff is a tax on imported goods. So, when a business relies on imported raw materials used in manufacturing their product, their cost to acquire that vital material goes up by paying taxes levied through tariffs, leading to a shrinking profit margin. Businesses with an existing high margin may be able to absorb the additional tax costs for a specific period. However, companies operating on low margins may not survive rising costs, leaving them with no alternative but to pass on the expense to the consumer, now paying more.

From Profit Squeeze to Survival Mode:

As consumers, we understand the inverse relationship between price and demand quantities. When a price increases, the demand for that good decreases as consumers look elsewhere for more affordable substitutes. This scenario would mean fewer sales and less revenue for the business owner or manufacturer to cover operating costs and overheads. Drastic cost-cutting and lay-offs may now be the last resort to keep the business afloat. And large-scale unemployment is a telltale sign of a looming recessionary period, with reduced consumer spending an inevitable reality.

Tariff Effects on Long-Term Profitability

Persistent Cost Pressure

The main driving force behind tariffs reflects the striving toward reduced reliance on imported goods by encouraging local production. Top decision-makers commissioned with trade policy changes should practice a cautious approach and a well-thought-through strategy. Higher costs mean less capital for research & development, marketing, and expansion through investment. This situation unavoidably decelerates growth and suppresses existing competitive edge and sustainable scaling efforts. Profitability isn’t an immediate survive-and-thrive win; it’s about remaining competitive in the future.

The Markets have Spoken

While market certainty and steadiness are indispensable, the consequences of uncertainty and unpredictability are paramount. Markets trade based on capital gain prospects, like a higher stock price or appealing dividend returns. As such, the lucrative promise of a healthy profit margin remains the epicentre. Subsequently,  the coupling of steep, obscure tariff levels has a detrimental effect on profitability, and the absence of a consistent and transparent trade policy creates uncertainty.

The reactionary selling off of tech and consumer stocks by investors, therefore, came as no surprise. Anticipating lower earnings was a logical response following the US tariff change announcements, with large institutional investors swiftly taking the cue. These market movers lost no time shifting assets into safer asset-class alternatives, like bonds. The sharp plunge in the S&P 500 was a resounding flex of market muscle, forcing a recalibration of the original tariff stance through sheer sentiment and pressure.

Conclusion

A healthy economy thrives on the equilibrium of careful consideration and substantiated foresight where trade policy, monetary strategy, and economic fundamentals align. The ripple effects are unmistakable, with the IMF predicting a reset in the global economic trade trajectory. After all, politics drive economics and economics drive finance. Warren Buffett saw it early, connecting looming political shifts to financial consequences. This level of experience and insight is a powerful reminder:  economic understanding shouldn’t be reserved for a privileged few. It belongs to anyone ready to take ownership of their financial future — made quick, easy, and accessible through our online course, Economic Insight. The riddle is solved. Berkshire’s visionary move finally speaks volumes.