Analysis: Stocks cheered Trump's victory, but tariffs bring unknowns to 2025
11/12/2024 06:00
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Barclays: Tariffs may cut S&P 500 earnings by 2.8%, hit
materials, consumer sectors
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Tariffs also could increase inflation measures in 2025,
analysts
estimate
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Investors recall 2018 trade war impacts, defensive stocks
outperformed, tech underperformed
By Lewis Krauskopf
NEW YORK, Dec 11 (Reuters) - The U.S. stock market
welcomed Donald Trump's victory in the 2024 presidential
election, but turbulence may lie ahead if the president-elect
makes good on his tariff threats.
Much about the incoming administration's policies remains
uncertain, including whether Trump's renewed threats last month
to impose tariffs on China, Canada, Mexico and other U.S.
trading partners are opening salvos to negotiating other issues,
such as border security.
The timing and extent of new tariffs are also unclear, and
the severity of the tariffs' impact on the U.S. could depend on
whether targeted countries respond with measures of their own.
Economists' worst-case forecasts, however, paint a worrisome
picture.
One extreme long-term scenario run by Oxford Economics
showed world trade shrinking as much as 10% and U.S. economic
growth about 1% below current expectations. Tariffs will hit
corporate earnings, particularly in the retail, industrials and
materials sectors, while stoking inflation, other forecasts
show.
"Tariffs are basically bad for the economy," said David
Kelly, chief global strategist at JP Morgan Asset Management.
"You can actually have a stagflationary effect of both
increasing inflation pressures and reducing economic growth at
the same time."
Trump's renewed threats caused waves in foreign currency
markets, but U.S. stocks largely shrugged them off as the market
extended this year's more than 26% rally, which has taken the
S&P 500 .SPX to record highs.
Barclays strategists estimated that proposed tariffs on
Canada, Mexico and China - and any retaliatory actions - could
drag S&P 500 earnings down 2.8%.
The materials and consumer discretionary sectors could
face double-digit earnings declines, due to their significant
supply and production presence in Mexico and Canada, Barclays
said.
Retaliatory tariffs by targeted countries would exacerbate
any earnings fallout.
BofA Global Research expects a 1% hit to S&P 500 earnings if
tariffs on China double to 40% while they rise to around 8% for
the rest of the world, excluding Mexico and Canada. But with
retaliatory tariffs, which hurt foreign sales, the earnings hit
would rise to 5%, the bank's strategists wrote.
Tariffs may also increase the core measure of the personal
consumption expenditures price index, a widely used inflation
gauge, to around 2.5% from 2.3% next year, according to Deutsche
Bank economists.
The Trump campaign did not immediately respond to a
request for comment.
LOOKING TO TRUMP 1.0
Trump has
called tariffs
"the most beautiful word in the world" and argued that his
plans would rebuild the U.S. manufacturing base, grow U.S. jobs
and incomes and earn trillions of dollars in federal revenues
over 10 years.
Some investors are reviewing Trump's tariffs during his
first term for insight into their potential effect this time
around.
The materials and industrial sectors were the market's worst
performers during a U.S.-China trade war in 2018, both falling
more than 5% over a nine-month period, according to RBC Capital
Markets.
Defensive stocks, popular during uncertain times, posted the
strongest returns, with utilities and real estate both rising
more than 10%, the bank said.
RBC's strategists earlier this month downgraded the
materials sector to "market weight" from "overweight," citing
its poor performance in that 2018 period as one factor. The
sector has fallen 3% since Trump's Nov. 5 election victory,
versus a 4% gain for the S&P 500 over that time.
The tech sector tended to underperform on days of announced
U.S. tariffs or China retaliations in 2018 and 2019, with
particular weakness in hardware and semiconductors, a Citi
analysis showed.
"However, given they remain at the forefront of the AI
(artificial intelligence) story and may benefit from a
front-loading of orders if tariffs are announced, we are less
concerned on the immediate risk," Citi strategists said in a
recent report.
Higher tariffs on China could put retailers, industrial
companies and tech hardware firms in the crosshairs, said David
Lefkowitz, head of U.S. equities at UBS Global Wealth
Management. Popular U.S. brands such as Apple AAPL.O ,
Starbucks SBUX.O and Nike NKE.N could face retaliatory
measures, Lefkowitz said.
Automakers manufacturing in Canada and Mexico could feel the
heat from any tariffs, Lefkowitz said. General Motors GM.N and
other auto shares sold off after Trump's tariff pledges last
month.
Bullish investors point to various parts of Trump's economic
platform, including tax cuts and deregulation, that could
potentially offset tariffs. Trump's choice of prominent investor
Scott Bessent to be U.S. Treasury Secretary, essentially the
highest-ranking U.S. economic official, was also well received
by Wall Street.
Trump has also historically measured his success at least in
part by the strength of the stock market, Lefkowitz said. That
could make him wary of implementing tariffs to a degree that
would badly hurt stocks, Lefkowitz said.
"They are trying to boost U.S. growth," Lefkowitz said.
"Tariffs would end up reducing it and Trump tends to focus on
how the market is performing. For that reason, the market has
been downplaying so far what we have heard on tariffs."
(Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and
Richard Chang)
((lewis.krauskopf@thomsonreuters.com; Twitter: @LKrauskopf))