Deere & Company (DE) beat earnings expectations this week, but the market wasn't exactly celebrating. Shares dropped Wednesday after the agricultural equipment giant warned that tariffs will cost the company a staggering $1.2 billion in fiscal 2026, casting a shadow over what would otherwise have been a solid quarter.

A $1.2 Billion Tariff Problem

The outlook for the coming year isn't pretty. Deere expects net income to land between $4.0 billion and $4.75 billion, a noticeable step down from the more than $5 billion it brought in during fiscal 2025. The culprits? Weakening demand in the large agriculture sector and a sharp increase in trade-related costs that are about to hit the bottom line hard.

Christopher Seibert, Manager of Investor Communications, spelled out the damage during the earnings call. "Included in this estimate is projected pretax direct tariff expense of approximately $1.2 billion, with additional inflationary pressures also contemplated from the indirect impacts of tariffs," he explained.

Josh Beal, Director of Investor Relations, added some helpful context: that $1.2 billion figure represents a $600 million jump from 2025 levels. So we're not just talking about ongoing costs—we're talking about costs that are accelerating significantly.

Inventory Cuts Run Deep

To navigate falling demand and rising costs, Deere has been cutting inventory aggressively. And when we say aggressively, we mean it. The company's inventory of its largest tractors—those 220 horsepower behemoths—has dropped to levels not seen in nearly two decades.

"To put in perspective how low absolute inventory levels are, new field inventory for Deere 220 horsepower and above tractors ended fiscal 2025 at the lowest unit level we've seen in over 17 years," Beal noted on the call.

That's a remarkable feat of inventory discipline, especially considering the pressures the company is facing. Management is clearly trying to avoid being stuck with expensive equipment sitting unsold as farmer demand softens.

Calling the Bottom

Despite the challenges, executives struck a cautiously optimistic tone about what comes next. Chairman and CEO John May told investors he believes the agricultural cycle is finally hitting bottom.

"Looking ahead, we believe 2026 will mark the bottom of the large ag cycle," May said. "While ongoing margin pressures from tariffs and persistent challenges in the large ag sector remain, our commitment to inventory management and cost control positions us to effectively manage the business."

Translation: things are tough now, but they shouldn't get worse from here. The company is positioning 2026 as a transitional year—one where they weather the storm and prepare for better days ahead.

Bright Spots in Construction and Small Ag

It's not all doom and gloom, though. While the large agriculture segment faces serious headwinds, other parts of the business are showing real promise. Deere forecasts that both its construction and forestry division and its small agriculture and turf segment will grow approximately 10% in fiscal 2026.

Josh Jepsen, Senior VP and CFO, emphasized the company's ability to maintain profitability even during downturns. Despite a 30% decline in the North American large ag industry this year, Deere delivered margins "over 450 basis points better than 2016, the last time we were at this point in the cycle," he noted.

That's impressive. It suggests the company has become more efficient and better at managing costs during difficult periods.

Stock Performance Lags Broader Market

Year-to-date, DE shares have climbed 12.36%, which sounds decent until you compare it to the S&P 500's 16.09% return over the same period. Over a full year, the gains look even more modest—just 0.83%. Wednesday's earnings reaction didn't help, with the stock falling 5.67% to close at $469.87.

The stock maintains stronger price trends across short, long, and medium terms, along with a moderate value ranking according to market data.