MW Here are all the ways Trump's tariffs could hit stocks, according to Goldman Sachs
By Jamie Chisholm
The S&P 500 is vulnerable to valuation multiples falling as earnings are crimped, uncertainty rises
Another Monday, another global market wobble. A week ago it was the DeepSeek Dive, this time it's Trump's Tariff Tumble.
Traders are shocked that a president who said he would place tariffs on countries with whom the U.S. has notable trade deficits has put tariffs on some of those countries. After Canada, Mexico and China, the European Union may be next.
The chart below from Goldman Sachs, shows how prediction markets late last week were not taking the tariff threat very seriously - setting up today's reaction.
And in a note published Sunday, Goldman strategists led by David Kostin have set out the equity market implications of Trump's latest move.
One way stocks may come under pressure is that large tariffs pose downside risk to S&P 500 SPX earnings estimates and return expectations, according to Goldman.
"If company managements decide to absorb the higher input costs, then profit margins would be squeezed. If companies pass along the higher costs to its end customers, then sales volumes may suffer," says the Wall Street bank.
They estimate that every 5 percentage point increase in the U.S. tariff rate would trim S&P 500 earnings per share by roughly 1-2%.
"As a result, if sustained, the tariffs announced this weekend would reduce our S&P 500 EPS forecasts by roughly 2-3%, not taking into account any additional impact from major financial conditions tightening or a larger-than-expected effect of policy uncertainty on corporate or consumer behavior," says Goldman.
(It should be noted that the bank's economists still think that the tariffs on Mexico and Canada will be temporary).
Another way equities may be pressured is that investor anxiety could weigh on stock valuation multiples. The chart below shows the spike in the economic policy uncertainty index, registering a top percentile reading for the last 40 years, Goldman notes.
"The historical relationship between policy uncertainty and the S&P 500 equity risk premium suggests that the recent uncertainty increase should reduce the forward 12-month P/E multiple by about 3%, holding all else constant," says Goldman. Remember, the S&P 500's forward P/E multiple is currently around 22, well above its historic average in the high teens.
The effect of higher borrowing costs in response to inflation concerns may have a more nuanced impact on stocks, however. Yes, the more monetary policy-sensitive short-end of the yield curve may rise, but longer-term yields may be suppressed by concerns about the damage wrought by tariffs on the economic growth outlook.
In addition, if the dollar rises with short-term Treasury yields, its impact on aggregate S&P 500 earnings may be limited, reckons Goldman. S&P 500 companies derive 28% of revenues outside the U.S., but less than 1% of revenues explicitly from each of Mexico and Canada.
"Our top-down earnings model suggests that, holding all else equal, a 10% increase in the trade-weighted USD would reduce S&P 500 EPS by roughly 2%," says Goldman.
Still, all told the tariff plan is not good news for stocks. "Combining these modeled EPS and valuation sensitivities suggests near-term downside of roughly 5% to S&P 500 fair value if the market prices the sustained implementation of the newly-announced tariffs," says Goldman.
If investors believe tariffs are a short-lived move toward a negotiated settlement, then the damage would be less. But stocks could fall further if traders view the latest announcements are signaling a greater probability of additional escalation.
The strategists said elevated economic and earnings growth expectations underscore the potential downside risk to stocks if investors are forced to reassess the fundamental outlook.
Markets
U.S. stock-index futures (ES00) (YM00) (NQ00) are sharply lower as benchmark Treasury yields BX:TMUBMUSD10Y nudge higher. The dollar index DXY is jumping, while oil prices (CL.1) climb and gold (GC00) is trading around $2,795 an ounce.
Key asset performance Last 5d 1m YTD 1y S&P 500 6040.53 -1.00% 1.65% 2.70% 21.82% Nasdaq Composite 19,627.44 -1.64% 0.03% 1.64% 25.58% 10-year Treasury 4.552 1.10 -8.40 -2.40 39.03 Gold 2828 3.10% 6.84% 7.15% 38.53% Oil 73.99 1.22% 0.76% 2.95% 1.63% Data: MarketWatch. Treasury yields change expressed in basis points
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The buzz
Shares of General Motors $(GM)$ and Ford Motor $(F)$ are down 6.5% and 4.2% respectively in premarket trading as investors worry that tariffs will impact U.S. sales and complicate cross-border supply chains.
Bitcoin (BTCUSD), which at one point on Friday traded above $105,000, is changing hands around $95,400 as investors dump riskier assets.
U.S. economic data due on Monday include the S&P final manufacturing PMI for January, released at 9:45 a.m. Eastern, followed at 10:00 a.m. by December's construction spending and the ISM manufacturing survey for January.
Atlanta Fed President Raphael Bostic speaks at 12:00 p.m. on the economic outlook.
NXP Semiconductors $(NXPI)$ and Palantir Technologies $(PLTR)$ may be the earnings highlights after Monday's closing bell.
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-Jamie Chisholm
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February 03, 2025 06:36 ET (11:36 GMT)
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