U.S. capital goods companies price in tariff costs to defend credit

According to an S&P Global Ratings report published today, U.S. capital goods companies could see cost increases of about 8%-10% under the U.S. tariff announcements from the first two weeks in April, or a price increase of about 6%-8% to hold profits steady.

According to "U.S. Capital Goods Companies Price In Tariff Costs To Defend Credit," the outlook on ratings in the U.S. capital goods sector is about 90% stable, owing to several years of steady earnings and moderate debt usage. The negative outlook bias is concentrated among the lowest-rated issuers, as maturities for 2020- and 2021-vintage leveraged buyouts in 2026 could coincide with higher interest rates, some profit misses, and economic uncertainty.

S&P Global Ratings sees pockets of high risk in the U.S. capital goods sector mostly among speculative-grade issuers with narrow operating footprints, a reliance on imports, and stretched credit ratios. The 35% of companies labeled as 'medium' risk typically face some mix of earnings pressure or weaker demand, and a lower buffer against our thresholds for a downgrade. About 50% of the portfolio is labeled 'low' risk, reflecting a good ratio buffer in case of a profit downturn and generally muted impacts from tariffs.

Our revised analysis reflects an average effective tariff rate on imported goods of about 24% (compared to 2.3% in 2024). Under this scenario, we estimate a total cost increase of about 8%-10% for U.S. capital goods companies, with more than half of this impact driven by higher tariff rates on China. That would translate into a break-even price increase of about 6%-8% to hold profits steady across the sector. In other words, without price mitigation, the total hit to EBITDA could approach 35% by early 2026.