How to Hedge Against Trump's Tariffs

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In keeping with the president's motto of "promises made, promises kept," Donald Trump is taking action on tariffs. In his first weeks in office, he announced tariffs on Canada, Mexico and China – and in early March, he pushed these through.

Most economists believe the effects will likely include a stronger dollar, higher inflation and interest rates, a decline in growth for countries that export to the U.S., and retaliation by at least some of them. In the short term, the fallout will probably depress the profits of American companies with strong sales abroad.

S&P Global reports that international sales represent 28% of the total revenues of the 103 members of the S&P 500 that report such statistics. For example, the proportion of foreign sales is 53% at Alphabet (GOOGL), 58% at Nike (NKE) and 42% at Deere (DE). If you want to hedge against the probability of a trade war, then you should stay away from the exporters and think domestic.

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Goldman Sachs recently listed 50 constituents of a "domestic sales basket," with emphasis on such sectors and industries as consumer staples, financials, homebuilders and healthcare. The list has some good choices – and I will get to them. But first, understand why many of these all-domestic stocks will, nevertheless, be harmed by tariffs.

How tariffs impact companies

Target (TGT) immediately caught my eye. Although its stores are all in the U.S., the company noted in its 2022 annual report that "a large portion of the merchandise that we offer is sourced, directly or indirectly, from outside the U.S., with China as our single largest source." Any major change in tariff or tax policy "could require us to take certain actions, including raising prices on products we sell."

Those higher prices – not just at Target but elsewhere in the economy, too – will probably discourage spending overall. Even with 100% domestic sales, Target and other retailers will be hurt by tariffs.

Another stock in the Goldman Sachs basket is Duke Energy (DUK), which operates utilities in the South and Midwest and will benefit from the growing domestic demand for electricity. But a trade war will cause interest rates to rise with inflation – bad news for a company that has to issue debt continually.

Similarly, Union Pacific (UNP) has no foreign revenues, but the railroad depends heavily on shipping grain, automobiles and other goods that eventually transit to and from Mexico and Canada, a business that could stagnate in a trade war.

Top stock picks to hedge against tariffs

Clearly, in a search for companies shielded from the impacts of tariffs, having zero international revenues is not a sufficient criterion on its own. Finding such companies requires further analysis. Also, in my search for a tariff hedge, I am leaning toward value stocks rather than highfliers that may have further to fall.

One of my top stock picks is Allstate (ALL), the fourth-largest U.S. property and casualty insurer and a company with zero foreign sales. While it has suffered some losses in California, I still find it an attractive option. Insurers such as Allstate actually benefit from high interest rates and a strong dollar because their assets are heavily invested in bonds.

The stock has risen 32% in the past year, thanks to higher premiums triggered by extreme weather events. Analysts at stock research firm Value Line project that earnings will grow by an incredible 30% on average for the next five years, but Allstate's price-to-earnings (P/E) ratio, based on analysts' estimates for 2025 profits, is just 11. (Stocks I like are in bold; returns and other data are through March 3.)

Most large banks have extensive operations outside the United States, with foreign commercial customers that could be hurt by higher U.S. tariffs. Capital One Financial (COF), another stock in the Goldman Sachs basket, is an exception: a domestic bank that makes its money through credit cards and consumer lending.

The company is in the process of acquiring Discover Financial Services (DFS), another credit card lender. Capital One stock looks attractive at a P/E of 16.

CVS Health (CVS) gets little love from investors, but it's a good example of my "faith-based investing" model: It has such a strong brand and widespread presence it has to be restored to health.

The company's retail stores have been hurt by online competitors, and its Medicare Advantage and pharmacy benefits management businesses are having trouble containing costs. As a result, the stock price has been sliced roughly in half in the past three years and now trades at a forward P/E of just 11, with a dividend yield of 4.1%.

Nucor (NUE), a pioneer in the use of electric arc furnaces to make steel, is one of the great American manufacturers. Its foreign competitors selling into the U.S. market were hurt by tariffs on steel during the first Trump administration, and Nucor benefited as well from the bipartisan infrastructure bill and green manufacturing subsidies during the Biden administration.

Lately, Nucor has suffered as the price of steel has fallen. But if President Trump ratchets up tariffs again, Nucor will be a major beneficiary. The stock trades at a P/E of 15.

It’s no secret that the new president's favorite cable network is Fox News. Its parent, Fox (FOX), is an all-domestic business with a P/E of just 11. Fox also owns local network affiliate stations and Tubi, an ad-supported streaming service. Shares jumped with Trump's victory, but remain modestly priced.

Homebuilder stocks may be affected if interest rates rise because of inflationary tariffs. But despite that drawback, they seem well-positioned to weather a trade war. Two large builders with no foreign sales are D.R. Horton (DHI) and Lennar (LEN). Both have low valuations. Unlike retailers, builders tend to use domestic suppliers. My favorite homebuilder is NVR (NVR), which has risen by a factor of 15 since I recommended it in 2010.

Trying to guess the effect of specific public policies on stock prices is usually a fool's errand. Businesses are brilliantly adaptive, figuring out how to dodge the obstacles that governments set for them. But I worry that a new, onerous tariff regime will be different. Yes, by making it more expensive for foreigners to sell goods here, tariffs may encourage more U.S. manufacturing. But there's little historical evidence that the cause-and-effect pattern is so simple. More likely, retaliation and higher prices will take their toll.

My strategy, therefore, is to find companies that will be hurt less than others – or may even benefit. If tariffs end up being benign, these stocks, as cheap as they seem, will make good additions to your portfolio anyway.

James K. Glassman chairs Glassman Advisory, a public-affairs consulting firm. He does not write about his clients. His most recent book is Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence. Of the stocks mentioned here, he owns NVR. You can contact him at JKGlassman@gmail.com.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

James K. Glassman is a visiting fellow at the American Enterprise Institute. His most recent book is Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence.