Navigating the Crossroads: Tariff Turbulence and Capacity Overhang in U.S. Freight Markets

The U.S. freight transport sector is at a crossroads. Prolonged tariff uncertainty and an oversupply of trucking capacity are creating a perfect storm of suppressed freight rates, delayed recovery, and heightened volatility. For investors, the path forward demands a nuanced understanding of these dynamics—and the ability to distinguish resilient players from vulnerable ones.

Tariff-Driven Volatility: A Double-Edged Sword

The U.S. freight market is grappling with the cascading effects of new tariff policies. The 25% levy on Canadian and Mexican imports, delayed until March 2025, and the Reciprocal Tariff Policy (with rates up to 34% for China) have reshaped trade flows and operational costs.

Trade Route Shifts and Cost Pressures:
Tariffs have spurred a surge in cross-border trucking with Mexico while diverting Chinese imports to tariff-advantaged regions. However, these shifts come at a cost. For instance:
- Commercial Vehicle Costs: A 25% tariff on Canadian/Mexican imports threatens Class 8 truck sales, with projections showing a 17% drop in 2025 sales due to higher prices and supply chain disruptions.
- Operational Expenses: Steel tariffs (50%) and compliance costs (e.g., customs paperwork) have driven up truck manufacturing and drayage expenses. The Producer Price Index noted a 9.4% rise in cold-rolled steel prices, squeezing margins for carriers.

Legal Uncertainty:
The legality of tariffs remains unresolved, with courts challenging some levies. A Supreme Court ruling under the "major questions doctrine" could reduce tariffs to single digits, easing freight demand. Until then, logistics firms face a "wait-and-see" environment, complicating long-term planning.

Capacity Overhang: The Elephant in the Freight Yard

While tariffs disrupt trade flows, an oversupply of trucking capacity continues to weigh on rates. Key data points paint a stark picture:

• Route Guide Depth: A measure of carrier reliability, this metric remains historically low. In June 2025, the overall U.S. route guide depth was 1.21, signaling ample supply. Short-haul routes (<400 miles) are particularly oversupplied, with a depth of 1.13.
• Carrier Attrition: The sector is shedding capacity at a 1.7% annual rate, with Class 8 truck orders down 45% y/y. This attrition could push capacity toward historical norms by late 2025—but only if it persists.
• Rejection Rates: Dry van tenders face a 7.5% rejection rate due to aging fleets and driver shortages.

Regional Disparities:
- Southeast U.S.: Produce volumes (e.g., Georgia watermelons) drove peak capacity tightness, but post-Labor Day, slackening demand could ease rates further.
- Central U.S.: Illinois and Indiana face tightening through August as produce seasons shift, creating pockets of opportunity.
- West Coast Ports: Drayage costs remain elevated due to import surges during the 90-day tariff pause on China, but Pacific Northwest capacity is ample.

Strategic Opportunities: Where to Look

Amid the chaos, select logistics firms are positioned to thrive. Investors should prioritize companies with:
1. Direct Shipper Contracts: Firms like XPO Logistics (XPO) or C.H. Robinson (CHRW) that lock in rates with major shippers are less exposed to spot-market volatility.
2. Regional Focus: Companies operating in regions with improving route guide depth (e.g., Midwest) or seasonal demand (e.g., produce hubs) can capitalize on capacity rebalancing.
3. Tech-Driven Efficiency: Investments in route optimization and compliance software (e.g., AI-powered customs tools) reduce operational costs and improve reliability.

A Cautionary Note:
Avoid carriers with high leverage ratios. Over-leveraged firms—such as those with debt-to-equity ratios above 2.0—face existential risks if capacity overhang persists. The sector's 30-point gap between rising input costs and stagnant output prices (per Fed surveys) leaves little room for error.

Conclusion: Patience and Precision Pay Off

The U.S. freight sector's recovery hinges on two variables: tariff resolution and capacity rebalancing. While spot rates may soften further in Q3 2025 due to seasonal lulls, gradual improvement could emerge by late 2025 or 2026 as attrition tightens supply.

Investment Strategy:
- Buy: Logistics firms with strong shipper contracts (e.g., CHRW) or tech-driven efficiency (e.g., XPO).
- Avoid: Over-leveraged carriers (e.g., those with high debt loads) and pure-play trucking companies exposed to spot-rate fluctuations.
- Monitor: Diesel prices, hurricane activity (for flatbed markets), and regulatory shifts like the CARB Clean Truck Regulation.

The freight market's volatility demands a selective, risk-aware approach—but for those who navigate it wisely, the rewards could be substantial.