Will CAT's FY2026 net tariff costs exceed $2.6B?

The Q1 2026 run rate of ~$800M/quarter implies a straight-line annual cost of $3.2B, already $600M above the $2.6B guidance. The resolution question is whether H2 improvement materializes as management expects. Three factors create upside risk to the $2.6B figure: (1) Section 232 investigations could impose additional tariff categories not yet in guidance, (2) the FY2025 escalation trajectory (Q2 ~$300M to Q4 ~$725M) shows policy implementation was front-loaded with compounding effects, and (3) mitigation effectiveness was only ~6% in FY2025 ($100M of $1.8B), so near-term offsets are minimal. However, management has some visibility into near-term policy and built the $2.6B figure knowing the Q1 run rate. The 'improvement toward H2' assumption likely incorporates some expected policy stabilization or supply chain shifts already in motion. This is a genuine coin-flip territory, but the exogenous nature of tariff policy and Section 232 tail risk push slightly below 50%.

Management guidance of $2.6B was issued with full knowledge of the Q1 ~$800M/quarter trajectory and the expectation of H2 improvement. The key question is whether management's visibility into tariff costs is reliable. In FY2025, tariffs escalated from minimal in Q1 to $650-800M by Q4 — a trajectory that management clearly did not fully anticipate at the start of the year. However, entering FY2026, they have better visibility on the existing tariff regime. The risk of exceeding $2.6B comes primarily from NEW tariff actions (Section 232, China escalation, retaliatory tariffs) rather than existing tariffs being worse than expected. The Myth Meter's identification of tariff trajectory as THE key swing variable, specifically noting it is 'exogenous and difficult to predict,' is the most relevant analysis fact. The $300-350M in restructuring costs suggests management is investing in mitigation but explicitly acknowledges this takes 'investments and time' — not a FY2026 solution. Probability below 50% because exceeding guidance requires policy deterioration beyond the current baseline, but above 35% because trade policy uncertainty is genuinely high.

The $2.6B guidance represents an $800M increase from FY2025's $1.8B — management is already guiding for significant escalation. This is not a case where management is underestimating tariff headwinds; they are explicitly guiding for a 44% increase. The quarterly profile expectation of ~$800M in Q1 with improvement toward H2 suggests management believes the tariff regime either stabilizes or moderately improves. The question is whether this expectation is overly optimistic. FY2025's escalating trajectory is somewhat misleading for calibration purposes — that reflected the initial implementation of tariffs throughout the year, whereas FY2026 starts with the full tariff regime already in place. The $2.6B figure likely includes some buffer given management's recent experience of being surprised by tariff escalation. Against this: Section 232 investigations are a genuine wildcard, the 54-day staleness of data means policy changes could have already occurred, and without mitigating actions the bill would be ~20% higher. But management has built the higher baseline into guidance.

The crux of this question is whether management's assumption of H2 improvement is realistic. The FY2025 trajectory showed consistent escalation, and the committee identified tariff trajectory as the key exogenous swing variable. Management guided $2.6B knowing Q1 would be ~$800M, implying they expect meaningful H2 moderation. But trade policy is inherently unpredictable — the Myth Meter flagged that the market treats tariffs as 'transient' while reality shows an 'escalating trajectory.' The 6% mitigation rate in FY2025 and the explicit acknowledgment that restructuring takes 'investments and time' suggest limited near-term offset capability. Section 232 investigations add a discrete risk of scope expansion. I put this at 44% — below coin-flip because management has visibility and has priced in significant escalation, but well above base rates for guidance misses given the exogenous nature of the risk.

Management's $2.6B guidance was established with awareness of the current tariff landscape. To exceed this, one of three things must happen: (1) existing tariff rates increase, (2) new tariff categories are imposed (Section 232), or (3) the H2 improvement they expect fails to materialize. The probability of at least one of these occurring over the remaining ~11 months of FY2026 is meaningful but not dominant. CAT has strong institutional knowledge of their supply chain costs and reasonable near-term visibility. The 54-day data staleness is a legitimate concern — if new tariffs have been announced since the Q4 earnings call, the probability could shift materially. But based on available analysis facts, management's guidance incorporates the known tariff regime and a realistic (if uncertain) expectation of moderation.

Corporate guidance on known cost items tends to be reasonably accurate — companies have strong visibility into their supply chain cost structure. While tariff POLICY is exogenous, the tariff COST to CAT flows through known supply chains with quantifiable exposure. Management has 4+ quarters of experience estimating tariff costs and calibrated the $2.6B figure after the full FY2025 experience. The 'without mitigating actions, bill would be ~20% higher' data point suggests management IS accounting for some mitigation in the $2.6B figure, even if gross mitigation effectiveness was only 6% historically. The Stress Scanner's finding that the fortress balance sheet can absorb even escalation is relevant — management may have guided somewhat conservatively knowing they can absorb overages. But on balance, I give management's cost estimation more credit than the exogenous policy risk warrants.

Escalating FY2025 trajectory ($250-350M to $650-800M/quarter) plus Section 232 investigations plus only 6% mitigation effectiveness creates meaningful probability of exceeding $2.6B. But management guided this figure knowing the Q1 run rate. Near coin-flip leaning slightly NO.

Management guided $2.6B with full awareness of the $800M/quarter Q1 run rate. Exceeding requires unexpected tariff escalation beyond current regime. While Section 232 is a risk, management typically builds in some buffer for known risk factors. The $2.6B already represents a 44% increase from FY2025.

Trade policy uncertainty is genuinely high — the Myth Meter identified it as the key exogenous swing variable. The Q1 run rate of $800M/quarter puts the straight-line at $3.2B. H2 improvement must materialize to stay within $2.6B. But management has near-term cost visibility and guided accordingly. Slight lean toward NO but high uncertainty.