Inside Markets — Tariff Impact

Sustained 25% tariffs on Mexico/Canada and 10% incremental tariffs on imports from China would likely add ~70bp to core US PCE prices (one time over ~2 quarters) and take GDP down by ~40 bp, holding everything else unchanged. The impact on markets is more difficult to predict because some companies will decide to absorb some/all of the higher input costs, while others decide to pass it along to customers. As a guess, expect sustained tariffs at these levels to take estimated 2025 SPX earnings down ~3%. There could also be some minor impact on earnings if these/other tariffs lead to more dollar strength. In total SPX companies get ~28% of their revenue from outside the US, so a ~10% increase in the dollar could take another ~2% off 2025 EPS estimates. None of this happens in a vacuum, but taking 5% off SPX EPS estimates should take the index down 5% as well, which suggests a worst-case SPX level of ~5740. There will likely be more tariff announcements in the days ahead (Eurozone) with the quick/aggressive approach potentially weighing on US business confidence and economic activity. We actually see greater risk to business confidence/economic activity from a prolonged period of tariff threats. Trump’s first ‘trade war’ with China was a long process that definitely took a toll on business confidence and tightened financial conditions until the Fed was forced to respond with policy easing.

Markets won’t price the full impact of known tariffs due to the expected frequency of conflicting headlines.  However, the longer this drags out, the worse it gets for equity markets, in particular.   The economic impact would be insignificant and the market could maintain the Goldilocks narrative if deals/agreements can be reached within ~2 weeks.  Credit markets will be important to watch during this period with widening spreads indicating greater likely economic impact.

There was meaningful technical damage to AI themed equities last Monday and these names remain vulnerable to greater downside until they reclaim former technical support.  For the Philadelphia Semiconductor Index, that level is 5100.  The broad market also came under pressure last Monday and again this morning with SPX support remaining at the 5783 November election upside gap.  This was the level that triggered strong momentum divergence buy signals on January 13.  A sustained break below that level would make 5615-5620 the next likely support range – this was the post-September Fed breakaway gap.