President Trump’s decision to impose sweeping tariffs on some of America’s largest trading partners sent shock waves through markets across the globe on Monday. Stocks began the day dropping sharply on Wall Street, tracking a global slump that came overnight as investors dumped shares of companies hardest hit by tariffs on imports from Canada, Mexico, and China. The chaotic rollout of the Trump administration’s plans whipsawed markets, leaving traders scrambling to adjust to developments as they unfolded.
Late Monday morning, the administration announced that tariffs on Mexico would be delayed for a month. After markets closed, a similar announcement was made about the tariffs on Canada. The dollar held on to broad gains as trading shook out, even as the peso and Canadian dollar clawed back losses.
Oil prices, which had risen over 3 percent earlier on Monday, settled back to a rise of around 1 percent. Major stock indexes in the United States also recovered some losses. By the end of the day, the S&P 500 had dropped 0.8 percent, while the technology-heavy Nasdaq fell 1.2 percent.
When Mr. Trump was elected, many analysts and investors dismissed his more aggressive tariff talk as a bluster intended to prompt negotiation from his global counterparts. But over the weekend, the new administration followed the president’s promise to impose 25 percent tariffs on imports from Canada and Mexico, the United States’ closest trading partners.
Canadian energy products and goods from China would be levied at 10 percent. The situation remains fluid as markets continue to react to the unpredictable nature of the tariff announcements, leaving analysts and investors on edge. Financial markets have whipsawed amid tariff negotiations between the US and its major trade partners.
If the US implements sustained taxes on exports like those recently proposed, it would likely cut S&P 500 Index earnings per share by 2-3%.
Markets react to Trump’s tariff plan
Beyond the additional 10% tariff on imports from China, the Trump administration has proposed, and since delayed, a 25% tariff on imported goods from Mexico and Canada.
Tariffs on the EU have also been suggested. It remains to be seen whether the US will implement substantial export taxes or reach a compromise with its trade partners. Economists’ baseline tariff forecast estimates that the effective US tariff rate could rise by about 4.7 percentage points.
If tariffs on Canada and Mexico are implemented, the effective tariff rate will be raised by an additional 5.8 percentage points. For the stock market, every five-percentage-point increase in the US tariff rate is estimated to reduce S&P 500 earnings per share by roughly 1-2%. As a result, if sustained, the US tariffs that were recently considered would reduce S&P 500 EPS forecasts by approximately 2-3%.
Tariffs could also potentially drive up the value of the dollar. A stronger dollar could further weigh on the earnings of S&P 500 companies, which derive 28% of revenues outside the US. For example, an earnings model suggests that holding all else equal, a 10% increase in the value of the trade-weighted dollar would reduce S&P 500 EPS by roughly 2%.
Tariffs could impact US stocks by causing greater uncertainty, potentially hitting earnings. The US has gyrated significantly amid trade uncertainty. Shortly before the announcement of the latest tariffs, a measure of policy uncertainty jumped to a top percentile reading relative to the last 40 years.
All else being equal, the historical relationship between policy uncertainty and the premium that investors demand from S&P 500 companies in return for holding their stock in times of elevated risk suggests that the recent uncertainty increase will weigh on the value of US stocks. It could reduce the forward 12-month price-to-earnings multiple by around 3%. Taken together, the models for earnings-per-share and valuations indicate the fair value of the S&P 500 could decline 5% in the near term should sustained US tariffs like those recently discussed take place.
A more short-term implementation of tariffs would have a smaller impact on equity markets.
