The tariffs imposed by the Trump administration have taken center stage in global economic news, triggering volatility across the markets. Investors have endured a rollercoaster ride, as near-daily shifts in tariff policy have contributed to ongoing turbulence and uncertainty. At this point, the key question is: how will this ultimately play out? Let’s first look at the dramatic policy swings that occurred in just the past 72 hours. Markets initially rallied on reports that President Trump would not dismiss Federal Reserve Chair Jerome Powell and that tariffs might be scaled back. The administration suggested that tariffs on Chinese goods would be reduced to a range of 50% to 65%—still extraordinarily high and likely to deter most Chinese exports to the U.S. However, mixed signals soon followed. Treasury Secretary Scott Bessent denied reports that the White House was considering a unilateral tariff reduction. Meanwhile, Chinese officials stated that no active negotiations on tariffs were underway. President Trump, who had originally announced a 90-day pause on new tariff hikes, later revised his stance, suggesting the delay would last only a few more weeks. Trump approaches trade—and most negotiations—through a “win-lose” lens. Tariffs have become a cornerstone of his trade policy, and he needs to emerge from this standoff projecting a “win.” So, how is this likely to unfold? In my view, the Trump administration will eventually lower tariffs to a global average of around 5%. While this would still exceed the current general level of approximately 2.5%, it would allow Trump to claim a political victory. He could argue that he has doubled tariff rates while highlighting increased revenue collected from these measures. Moreover, he could retain leverage by threatening future tariff hikes against countries that maintain large trade deficits with the U.S. or that he believes are acting unfairly. This strategy would enable Trump to claim success while quietly backing away from a tariff policy that has proven economically disruptive and politically costly.
The earning reports of U.S. companies as many withdraw their guidance for the year is making clear how vulnerable the U.S. economy is to high tariffs. The second quarter earning reports in July are likely to look disastrous if tariffs are left in place. The US stock market’s tariff exposure is about to be laid bare https://finance.yahoo.com/news/us-stock-market-tariff-exposure-093000367.html (Bloomberg) — President Donald Trump’s raft of tariffs is set to expose just how vulnerable the US stock market is to a trade war. The track record of S&P 500 (^GSPC) Index companies over the past two decades suggests their ability to withstand additional levies is fragile, at least by one measure. Nearly all of the margin growth eked out from corporate sales on the gauge since 2004 has come from the booming technology sector, according to Bloomberg Intelligence. Removing the group, profitability barely rose. The consequences for the US economy and corporate profits from the proposed tariffs is one of the top concerns that investors have been grappling with this month. The first-quarter earnings season so far has shown that companies themselves are unsure of the fallout, further adding to the angst. “Not only is the S&P 500’s ability to absorb the tariff shock weaker than it appears, I would argue that because of tech, the index is also more vulnerable to tariffs,” said Paul Nolte, market strategist and senior wealth manager at Murphy & Sylvest Wealth Management. While Trump and his administration are currently in talks with more than 50 countries, the average tariff rate stands at around 22.8% and could go as high as 32.6% depending on how negotiations resolve, Bloomberg Economics estimates. Such high levies are likely to be extremely disruptive for American businesses, raising their costs and squeezing profitability. Thin Cushion The unremarkable expansion of operating margins across the rest of the S&P 500 over the past two decades means, if tariffs turn into a major headwind, the majority of the remaining US companies in the index barely have any cushion left to absorb the impact and grow further. S&P 500 companies are estimated by BI to have an operating margin of 16.4% in 2025, which drops to 13.5% when excluding technology, though the estimates likely don’t yet reflect the full impact of the potential new trade regime. The tech sector by itself is estimated to generate a margin of 34.1% this year. “There was a reason why the mega-cap tech stocks were dominating the rally in 2023 and 2024 — they were making huge profits, while almost everybody else was floundering,” said Matt Maley, chief strategist at Miller Tabak + Co. Maley sees more reason for caution with overall earnings estimates for the year being reined in. Analysts now estimate 2025 profits for the S&P 500 will rise 7.9%, down from an expectation of nearly 13% growth at the beginning of the year, data compiled by BI show. “If the one area that was still driving increases losses steam, it’s going to catch a lot of investors off guard, even after this outsized decline,” Maley said, pointing to the recent selloff ignited by Trump’s tariffs on the country’s trade partners on April 2. It’s a wake-up call for investors who have been enjoying the tremendous run in US stocks over the past few years, driven largely by technology companies. The group now wields a massive influence on the overall S&P 500 given its market-cap weighted composition. Technology stocks themselves are also highly susceptible to declines in share prices given their still-steep valuations and risk dragging down the overall gauge, given the sector’s hefty weighting. “Tariffs will hinder the benchmark’s largest earnings growth engine,” said Michael O’Rourke, chief market strategist at JonesTrading. “Tech will likely be the source of the largest margin drag within the index.”
Major companies face a difficult task in estimating the impact of tariffs on their business https://finance.yahoo.com/news/major-companies-face-difficult-task-150257395.html