Tariff announcement spooks investors
After the market closed yesterday, President Trump announced sweeping tariffs which triggered a sharp decline in U.S. stock markets. The proposed tariffs, with a baseline of 10% and potentially higher rates for certain countries, have raised concerns about a global trade war, impacting multinational companies and investor sentiment.
The market’s reaction reflects the realization that the effective tariff rates will be substantially higher than anticipated, particularly for countries like China. This “worse-than-expected” escalation has led to concerns about the complexity and potential impact of the new tariff structure. The resulting uncertainty, compounded by emerging sluggish economic data, has intensified recession fears and is pressuring stocks lower.
Analysts have been turning more cautious about U.S. corporate earnings for the first quarter of this year, with the Trump administration’s policies threatening to trigger a global trade war that could undermine economic growth. S&P 500 forecasts for the first quarter of 2025 have fallen by 4.5 percentage points since January 1, the largest downward revision since the fourth quarter of 2023. Earnings growth for S&P 500 companies is now seen at 7.7% year-over-year, which would be the lowest since 2023’s third quarter and a big decline from 17.1% in the fourth quarter of 2024.
We are about to enter the 1Q25 earnings season. I expect that CEOs will express more cautious views during earnings conference calls because of yesterday’s tariff announcement. It would not surprise me to see FY25 S&P 500 profit growth estimates shrink to 0-3% based on the impact from the announced tariffs and higher prices effect on demand. The S&P 500 is down about 7% YTD based on last night’s move lower. If profits end the year roughly flat with FY24, then the S&P would be trading for approximately 22-23x earnings which is probably too high. However, a lot depends on what the actual tariff rates end up being, which won’t be known for weeks or months.
The consumer is getting more cautious
Adding to the market’s unease, the Conference Board’s Consumer Confidence Index has revealed a significant drop in March, with the Expectations Index falling to a 12-year low. This decline signals growing pessimism about future economic conditions, driven by concerns about income, business, and labor market prospects. Consumer sentiment regarding the stock market has also shifted, with more individuals expecting declines, reflecting the impact of recent market volatility.
Despite the overall pessimism, there have been some surprising trends in consumer behavior, such as an uptick in intentions to purchase big-ticket items, potentially in anticipation of tariff-driven price increases. However, the broader economic outlook remains uncertain, with consumers expressing concerns about inflation, trade policies, and general economic and policy uncertainty.
Businesses face challenges adjusting to tariffs
Some sectors of the economy are facing particular challenges due to the shifting tariff policies, impacting those companies that manufacture in China, Mexico, and Canada. It is difficult for businesses seeking alternative production sites to mitigate the escalating costs associated with these tariffs, which threaten profitability and operational stability. Moreover, tariff policy may change in three to four years which makes business investment planning difficult. The impact extends beyond manufacturing, affecting consumer purchasing power and potentially leading to price increases on everyday goods.
Relocating manufacturing operations is a complex and costly endeavor, as established manufacturing hubs in China offer unparalleled supply-chain efficiencies and labor expertise. While some larger corporations have shifted production to other Asian countries, many of these countries also face tariff headwinds. For many businesses, onshoring production to the U.S. is simply not a viable option in the short term due to cost constraints.
Congress unveils tax plan
Meanwhile, Senate Republicans have unveiled a budget blueprint aimed at fast-tracking the renewal of President Trump’s tax cuts and increasing the national debt limit. The plan proposes a $4 trillion extension of the 2017 tax cuts, with an additional $1.5 trillion in new tax reductions. However, this plan faces political and fiscal challenges, with Democrats criticizing the potential impact on social welfare programs and divisions within the Republican party regarding spending cuts.
The budget blueprint is a crucial step in the legislative process for extending Trump’s tax cuts, but it also raises concerns about increasing deficits. The plan allows for a separate vote on the debt ceiling, providing flexibility if a federal default looms. However, the potential for increased deficits and the political challenges surrounding the plan add to the overall economic uncertainty.
Opportunity in uncertainty
Investor sentiment has weakened in tandem with the decline in profit growth prospects. This is reflected in lower stock prices and a 10-year US Treasury yield that has declined from 4.6% to 4.1% in the YTD period, despite inflation remaining stubbornly higher than the Fed’s 2% target. Right now, investors are more fearful of an economic slowdown than they are concerned about the rising inflationary effects of tariffs.
As long-term investors, we must remember that market corrections are normal. Moreover, selloffs create opportunities to buy high-quality businesses at attractive prices. Today’s market is being driven by political decisions that can change quickly and are difficult to predict. Thus, we expect that volatility has the potential to be extraordinarily high in the coming months, or at least until the economic outcome of the change in trade/economic policies becomes clearer. Balanced and diversified portfolios are designed to weather these ups and downs. The seatbelt sign is now on. Let’s look forward to finding the opportunities rather than dwelling on the bumpy ride.
Anthropologist Jane Goodall is 91 today, singer Wayne Newton is 83, actor and comedian Eddie Murphy turns 64, and former NHL goalie Bernie Parent turns 80.
Christopher Gildea 610-260-2235