In my last column I wrote about how volatility is the price of admission for long-term wealth creation. Policy shakeups were the predominant reason for the volatility in the first half of 2025.
In April, President Trump declared “Liberation Day” for trade, unveiling sweeping tariffs on imports from nearly every major U.S. trading partner. Markets recoiled. The S&P 500 dropped more than 12% in a week, while Value and Growth stocks alike fell sharply.
I often like to point investors to Lao Tzu’s quote that says, “If you do not change direction, you may end up where you are heading.” Faced with political and business backlash, the administration rolled back or delayed several of its harshest provisions, and stocks moved toward recovery. By June’s end the S&P had rebounded 25% from the April lows.
Tariff costs are real and can weigh on profits, but companies with strong competitive advantages usually find ways to adapt. Also, the volatility created by policy shocks often resets valuations and creates opportunity for disciplined buyers. I think the experiences for Deere, Caterpillar and Eaton all illustrate these points.
Industrial Opportunities
Deere (DE) absorbed a $200 million tariff hit in its fiscal Q3 and expects $600 million in costs for the year. Large Agriculture sales fell 16%, yet management still projects net income in the range of $4.75 to $5.25 billion this year. Deere’s ability to proactively manage inventory, improve dealer networks and advance precision technologies like See & Spray shows how even in a tougher environment the company remains well positioned.
Caterpillar (CAT) also faced pressure, with Q2 revenue down 4% to $17.3 billion. Despite the hit, margins improved to 21.3% and backlog grew by $2.5 billion. Management acknowledged tariffs will weigh on profitability, but strength in infrastructure and power generation has the Street expecting a return to sales growth in FY 2026. Caterpillar continues to generate robust free cash flow and remains a dominant force in heavy machinery.
Eaton (ETN) provides a different perspective. The power-management leader posted record Q2 EPS of $2.95, up 8% from a year ago, driven by strong orders in Electrical Americas. Management now expects 12% EPS growth for 2025 at the midpoint. Even with some cyclical softness, Eaton is positioned to benefit from megatrends like electrification, reindustrialization and defense spending.
Bottom Line
Tariffs add uncertainty, and they can squeeze margins and create volatility that resets valuations. Still, firms like Deere, Caterpillar and Eaton show that competitively advantage companies can lean on their backlogs, pricing power and strategic flexibility to adapt. For long-term investors, policy shocks are not necessarily reasons to sell. More often, they are chances to lean into resilient businesses built to thrive once the dust settles.
*****
For those who like what I have to say in this forum, further market analytics and stock picks can be found in my newsletter, The Prudent Speculator.