Bank of America forecasts that the ongoing trade war may lead to a decline in S&P 500 earnings per share by as much as 8%.
Given that earnings are a key driver of stock market performance, the risks posed by the trade war to U.S. equity returns are significant. However, other Wall Street banks have a less pessimistic view compared to Bank of America.
The U.S.-led trade war could severely affect S&P 500 earnings. Bank of America estimates that if the U.S. imposes a 25% tariff on Canada and Mexico and a 10% tariff on China, S&P 500 earnings per share (EPS) could decline by 2%—1.7% from Canada and Mexico and 0.3% from China. Should the situation escalate to bilateral tariffs, the EPS decline could reach as high as 8%.
Considering the increasing protectionist stance in the U.S., these risks are quite tangible. Just weeks into Trump's presidency, tariffs were announced against North American trade partners, along with an additional 10% on Chinese products. Although tariffs on Mexico and Canada have been postponed, the initial announcements prompted retaliatory commitments from both nations.
While the trade war could disrupt S&P 500 returns, most Wall Street banks do not share Bank of America's grim outlook on EPS impacts. Goldman Sachs, in a recent report, estimated that Trump's protectionist policies could lead to a 2%-3% drop in S&P 500 EPS, as every 5% increase in tariffs typically results in a 1%-2% decline in earnings, potentially dragging the market down by 5%.
Barclays also pointed out in December that a full-scale trade war could result in a 2.8% drop in S&P 500 EPS, particularly affecting non-essential consumer goods and materials sectors heavily reliant on production in Mexico and Canada, which may face double-digit declines.
Despite the threats posed by trade tensions with Canada and Mexico, Bank of America noted that tariffs might initially have a positive effect by triggering inventory restocking cycles. Additionally, companies have become more prepared for trade tensions since the tariffs from Trump’s first term have not been lifted, and U.S. exposure to Chinese exports has decreased by over a third.
Prior to tariff disruptions, U.S. corporate earnings were robust, with a 12% year-over-year growth in Q4. Optimism on Wall Street reached new heights, with increased discussions about sectors "hitting bottom," indicating potential earnings recovery.
Analysts noted, "Our corporate sentiment index has soared to its highest level since 2004. This indicator leads S&P 500 EPS year-over-year changes (with a one-quarter lead and a 69% correlation), suggesting an ongoing upward earnings cycle."
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