Inside Markets — Tariff Headwind

While the magnitude of yesterday’s tariff announcement was slightly larger than many expected, our original estimate for the headwind to fade in mid-late Q2 stands. Regardless of the scope/magnitude, we expect a period of retaliation, escalation, and negotiation to last into June at least. But equity markets should begin to recover 2-4 weeks before headlines move onto something else. From a policy perspective, deregulation is a more equity-friendly topic than tariffs and an efficient/effective way to encourage reshoring.

Our immediate concern is a close below 5500. In our view, closing levels below 5500 mark a transition to a more volatile bearish phase that could generate another 6-7% of downside. On volatility, we note today’s relatively muted uptick in the VIX to 27.8 but expect the index to advance further on a sub-5500 close. Once the VIX gets into the mid-30 and higher, it usually takes months to return to subdued levels below 20. Higher volatility always leads to a higher risk premium and lower multiples.

It’s a moving target, but the SPX EPS estimates for ’25 and ’26 have seen downward revisions. Using current consensus estimates of ~$304, the SPX is currently trading at ~18x forward earnings, down from a peak of ~22 in February. Valuation is a horrible market timing tool, but, for context, 15-17x forward earnings is an average historical multiple.