By Meghan Bobrowsky and Patience Haggin

The $350 billion U.S. digital advertising market, which has helped tech companies finance expansions into artificial intelligence and a host of other arenas, is preparing for a slowdown.

Small businesses and ad buyers are evaluating tariff-related pullbacks, and early signs from April point to slowdowns from the auto, travel, fashion and online-spending industries, according to analysts and advertisers.

"There has been a reaction already," said Eric Seufert, a digital-ads consultant. "What companies are doing now is trying to conserve cash to pay the tariffs that they have to pay. The most effective way to do that would be to cut ad spend right now."

The ad sector can be particularly sensitive to economic cycles, as brands pull back on advertising when their consumers are less likely to buy. The tariffs and the subsequent fallout, including inflation and supply-chain disruption, are expected to affect all media and tech companies that rely heavily on ad spending.

A prolonged economic downturn would curb sales from Meta Platforms and Alphabet's Google by tens of billions of dollars. As much as $10 billion in ad sales mainly from China is at risk for Meta. That business has ballooned in recent years owing to the rise of discount-shopping platforms such as Temu and Shein.

Google faces potential spending reductions from China as well. The U.S. is set to close a loophole that waived tariffs on shipments coming into the country whose value was $800 or less. A Google executive said on a call Thursday with analysts that the change would create a "slight headwind" for its ad business in 2025.

"We're obviously not immune to the macro environment," said Philipp Schindler, Google's chief business officer. He declined to speculate further on the effects of tariffs.

While Meta doesn't operate its services in China, advertisers from the country buy ads on its apps to reach U.S. consumers. Two changes -- 100%-plus tariffs on imports from China and the end of the $800-or-less loophole -- now make it virtually impossible for Chinese companies to sell their goods in the U.S. That extinguishes their need to reach American consumers through ads on Instagram, Facebook and Google.

Many platforms from China, including Temu and Shein, took advantage of the loophole, called the de minimis exemption.

Given that tariffs began taking hold this month, the pullbacks aren't likely to show up yet because many of the world's largest tech companies report earnings in the coming week. Meta and Amazon.com report results next week. Advertising from Google's search business and YouTube rose in the quarter ended in March compared with a year earlier, Alphabet said Thursday.

Brian Wieser, an advertising analyst, said spending likely rose in March because of a "fear of tariffs" effect. That fear motivated consumers to buy, and marketers stepped up their ad spending to put their products in front of eager customers.

Yet in April, signs began to emerge of advertising challenges.

An investment-banking firm, Evercore ISI, said it was already seeing ad spending in certain sectors including e-commerce slow in April. Auto ad spending, in particular, dropped from 47% year-over-year growth in March to a year-over-year decline of 42%, the firm said.

There is a tremor in ad categories such as auto and consumer packaged goods, "a cautious stance that could fade or turn into full-blown cuts," said Andrew Casale, chief executive of Index Exchange, an ad exchange. "Whether it's the end of a trade war or the start of a recession will shape what comes next."

Digital companies often are the first to be hit by an ad slowdown because marketers can turn off spending in real time. Other forms of advertising, such as buying TV commercials, are harder to cancel at a moment's notice. And digital is often the first to benefit when the economy improves. When the pandemic took hold in 2020, tech giants were among the first to experience the pullback but were also the first to see a return.

Ad executives are hoping that the Trump administration will cancel or scale back tariffs. While some major brands have yet to reduce ad spending and are engaged in scenario planning for potential cuts, small businesses could move far more quickly.

Meta's heavy reliance on small businesses and e-commerce companies is likely to take a toll if the full force of proposed U.S. tariffs -- and those that other nations impose in response -- takes effect around the world. Small businesses make up a large proportion of Meta's ad revenue. Meta works with more than 10 million advertisers.

Write to Meghan Bobrowsky at meghan.bobrowsky@wsj.com and Patience Haggin at patience.haggin@wsj.com

(END) Dow Jones Newswires

April 24, 2025 19:37 ET (23:37 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.