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3/17/2025
Tariff Disturbances: More uncertainty on trade and to what end?
David Bianco
Chief Investment Officer, Americas
Investors are nervous about tariffs. Nervous about how high and long they might go and last. But not just nervous about s as a means, but increasingly uncertain as to what end. On Thursday last week, the S&P 500 closed at 5522 or 10.1% below its Feb. 19 record high of 6144. The first since the 2022 upon Russia’s aggression, a notable disturbance. The correction came as additional steel and aluminum tariffs took effect on March 12th with retaliatory tariffs by Canada announced and a general escalation of tit-for-tat rhetoric. Fighting with Canada put a spotlight on the question, “to what end or goal are tariffs being enacted?” We expected that tariffs would be used to achieve geopolitical goals and secure borders. And once some wrinkles were ironed out between friends, a unified North American free trade block would be a tool to sway the rest of the world toward shared democratic world order security goals.
Business manager and consumer confidence are being hit hard by pending tariffs and some investors think that if these tariffs aren’t deescalated soon that the economy could stall and the stock market fall further. We share some of this concern, as we are doubtful that the threat and rising use of tariffs by President Trump is going to deescalate in the near-term. However, we think that with greater clarity expressed that the main purpose of seeking fair and reciprocal free trade with our allies is to help ensure peace by further strengthening our allied economies and also managing access to our combined economies as deterrence to any challengers and an incentive to align. If this is the main objective and it is better communicated, we think investors will stay confident and the economy resilient through this transition and the transition will also be smoother and quicker, particularly with our friends north and south as well as those in Europe.
The trade deficit is measured based on the sales value of exports less imports. US imports more than exports, yet US exports are generally high margin and much more profitable products. This typically keeps US industries and workers at their highest and best paid use. When foreign nations earn net dollars from trade, often from heavily deploying their resources with only low returns to their capital and labor, their dollar earnings are usually invested in dollar assets. Most such capital account investments are in low returning Treasury bonds. In effect, many countries toil away and deplete their resources just to buy US government debt. Who’s the winner and loser here? Well, in our opinion it’s not zero sum, as it brings relative improvement for all when free market based, but those that embrace free trade and foster innovative economies are the ones that stay on top. If we restrict trade and push our economy toward lower return on capital and worker pay industries, then inflation and slower real growth are likely. It might also drive up real interest rates as domestic capital is redirected and foreign savings from trade surpluses aren’t recycled into the US. Thus, better ways exist to raise tax revenue or help prior manufacturing towns than tariffs. Dear Mr. President, please tear down all trade walls between our closest and most trusted allies.
Our 12-month scenarios across global equity markets benchmarks are supported by DWS economic forecasts for decent US and global growth in 2025 and 2026 and even an expected acceleration in Europe on greater fiscal spending. We forecast 10%+ global equity returns in local foreign exchange (FX) over the next 12-months, as some or the adverse or scare scenarios should be sorted out by “deal-making” a year from now; however, these “deals” and clarity in purpose would be welcome soon, because global consumer and investor confidence has started to deteriorate. Nevertheless, the global economy has remained surprisingly resilient during the past 15 years despite a lake full of black-swans-events (Euro-crisis, Brexit, Chinese housing-bubble, Covid, Ukraine, Israel-Gaza). This might justify optimism in healthy economic and profits growth despite the current trade disturbances. Our targets for March 2026 assign slightly lower multiples in US and Asia, while we lift the European by 0.5 to reflect improved GDP forecasts. Europe’s latest commitments to defense, energy security and other infrastructure spending has an invest in peace purpose that equity investors cheer, but should also help bolster European business and consumer confidence despite higher and a stronger Euro since.
We trim our S&P estimates as we raise expected US imposed tariffs from about 5% in aggregate to 5-10% by yearend or between $150-300 billion annually. This is 0.5-1.0% of US GDP; which roughly about half could add to and half subtract from real growth. Thus, we lower 2026 estimated US GDP to 2.0% from 2.2% and see potential for slower growth in 2025 if tariffs climb quickly to $300bn and are simultaneously in effect on Canada, Mexico, China and Europe. The cut to our S&P EPS outlook is small because it affects mostly goods manufacturers and retailers, whereas most S&P EPS stems from Tech/digital firms, Financials and Health Care. We cut S&P EPS by $1.50 at Industrials, $1.50 at Energy/Materials, $1 at Consumer Discretionary and slightly at Tech and Health Care. Estimate changes net of final 2024 results and outlooks. Overall non-GAAP () 2024 S&P EPS quality is in-line with history, but we note inappropriate addbacks of stock option expense and questionable addbacks of expense.
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