Pricing power in the age of tariffs

 This article was written by Steve Hou, PhD, Quantitative Researcher at Bloomberg. 

The age of tariffs has returned, and they are big numbers.  As of writing on Apr 10th, 2025, US tariffs on imports from China have already escalated to 145%, after having successively risen from 20% to 54% and then 104%. Overnight, the US average effective tariff rate went from 2.3% to 26.5%, in any event the highest in more than a century. In the words of Paul Krugman, the renowned international trade economist and Nobel Prize laureate, the recently announced US trade tariffs by President Trump “make the Smoot-Hawley tariffs look like a rounding error.” 

Regardless of the outcomes of the highly volatile and uncertain trade negotiations, it is reasonable to expect that the world will change in a fundamental way, and we are headed into a much more protectionist global economy. International trade barriers will be higher going forward. In the current economic environment, companies with strong pricing power have historically demonstrated resilience by effectively managing input cost changes and maintaining margin efficiency. Indexes that track such companies may offer insight into how certain segments of the market are positioned to respond to inflationary pressures. 

In prior research, we have shown that companies with strong pricing power can be systematically identified by screening for those with long-run stable gross margins. In a 2023 whitepaper we showed that pricing power as a factor has outperformed the broader market by having favorable style factor exposures. Leveraging the TLTS <GO> function on the Bloomberg Terminal, we see that BPPUST Index (relative to B500EQT Index benchmark) has positive exposures to quality, growth and negative exposure to value, which is compensated by lower volatility (beta) and lower idiosyncratic volatility.  

Tariff resiliency

The Bloomberg Pricing Power Index is a good illustration of how pricing power stocks may be more resilient in an economic environment with high tariffs as firms having to manage tariff pass-through or risk margin erosion. During both the trade wars during President Trump’s first term in 2018 and the more recent and deeper one in 2025, the pricing power stocks displayed much greater resiliency than the broader stock market. (BPPUST Index comprises 50 stocks equal weighted.) 

Inflation sensitivity

Another way to see how pricing power stocks may fare during trade wars with heightened macro uncertainty is to look at the performance of the pricing power stocks relative to the broader benchmark during periods of rising inflation. The post-COVID inflation wave represents the biggest macroeconomic shock the US economy has experienced in the last 40 years.  

The strong outperformance of the Bloomberg Pricing Power index during inflationary episodes provides one way of anticipating how companies with strong pricing power may respond to tariffs. Input cost increases and uncertainty are both likely consequences of tariff pass-throughs. In Figure 5 and 6, pricing power companies outperformed during both the post-COVID period and the years leading into the 2008 financial crisis. Companies with strong pricing power can pass on cost increases more easily to customers and maintain their margins often because of superior supply chain management or oligopolistic power. 

Investors may also glean some useful intuition from the sector exposures of strong pricing power companies, which tend to come from consumer staples, industrials, health care, and consumer discretionary sectors. These are the sectors that tend to be the most domestic facing in terms of both revenues and supply chain. Furthermore, the fact that their products have generally more inelastic demand, such as groceries, medicine, or hard to substitute industrial and consumable parts, means that these companies are able to more easily pass on the additional input costs including tariffs. 

To conclude, the return of significant tariffs has created a volatile and uncertain macroeconomic landscape. We believe that companies with strong pricing power have demonstrated resilience during periods of trade wars and rising inflation. Although historical returns are not a guarantee of future performance, by focusing on companies with stable gross margins, investors may be able to navigate the challenges of a protectionist global economy and find opportunities for growth and stability.