Larger, not priced, and coming at a bad time
The tariffs are:
Larger than expected: Trump's proposals are likely to raise the weighted average tariffs on US imports from 2.5% as of end 2024 to 24%, levels not seen since the 1920s. Both the magnitude of ‘reciprocal’ tariffs imposed per country and the set of countries they were imposed on were larger than many had reasonably anticipated. That they come on top of a 10pc universal tariff is an added shock. This has the potential to considerably worsen the growth inflation mix in the US and the global economy in the coming year. Our US econ team believes it's plausible US’ 2025 real GDP could be compromised by 1.5-2pp and inflation could rise to close to 5% if these tariffs are not reversed soon. The magnitude of damage they could cause to the US economy makes one’s rational mind regard the possibility of them sticking as low. This brings us to the next point.
Not priced: Our Tariff Fear Gauge (Figure 1)SandEUTariffFearGaugeU , which is measured on a scale of 0-100, sat at 11 for US equities and 46 for European equities as of market’s close on April 2nd. This fear gauge calculates returns of US and European tariff affected companies that are not explained by changes in macro variables such as growth, real rates, credit spreads or inflation expectations. Essentially, till yesterday the markets were thinking of tariffs purely as a negotiating tool, not an ideological one. Indeed, there is a chance that rates of reciprocal tariffs do come lower as trading partners negotiate with the US, but the 10pc universal tariff suggests this administration firmly believes tariffs are the policy needed to fundamentally alter trade and economic relationships with the global economy. Hope for tariffs being negotiated lower immediately are also challenged by
a) the strong possibility of retaliation from US' trading partners, and b) the difficulty of countries negotiating lowering of non tariff barriers which, according to the US administration, includes domestic taxes, currency levels and other regulations.
Come on the back of an economy already slowing: The US consumer was already showing clear signs of fatigue. The soft data has been worsening considerably as the fiscal impulse and immigration, two big supports to growth in the last 3-4 years, have both faded. In our opinion, even without tariffs, the US economy was due to go from exceptional to trend this year, a notion that wasn't at all priced in earnings. Negative earnings revisions for 2025 have unsurprisingly been coming thick and fast. From an expectation of 13% at the beginning of the year (Figure 4Iifi)MSUSsectorcontributionto3mchangn12wdearngsCemn , 2025 earnings now risk declining much lower than 6-7% earnings growth we thought they would stabilise at.
The tariffs are:
Larger than expected: Trump's proposals are likely to raise the weighted average tariffs on US imports from 2.5% as of end 2024 to 24%, levels not seen since the 1920s. Both the magnitude of ‘reciprocal’ tariffs imposed per country and the set of countries they were imposed on were larger than many had reasonably anticipated. That they come on top of a 10pc universal tariff is an added shock. This has the potential to considerably worsen the growth inflation mix in the US and the global economy in the coming year. Our US econ team believes it's plausible US’ 2025 real GDP could be compromised by 1.5-2pp and inflation could rise to close to 5% if these tariffs are not reversed soon. The magnitude of damage they could cause to the US economy makes one’s rational mind regard the possibility of them sticking as low. This brings us to the next point.
Not priced: Our Tariff Fear Gauge (Figure 1)SandEUTariffFearGaugeU , which is measured on a scale of 0-100, sat at 11 for US equities and 46 for European equities as of market’s close on April 2nd. This fear gauge calculates returns of US and European tariff affected companies that are not explained by changes in macro variables such as growth, real rates, credit spreads or inflation expectations. Essentially, till yesterday the markets were thinking of tariffs purely as a negotiating tool, not an ideological one. Indeed, there is a chance that rates of reciprocal tariffs do come lower as trading partners negotiate with the US, but the 10pc universal tariff suggests this administration firmly believes tariffs are the policy needed to fundamentally alter trade and economic relationships with the global economy. Hope for tariffs being negotiated lower immediately are also challenged by
a) the strong possibility of retaliation from US' trading partners, and b) the difficulty of countries negotiating lowering of non tariff barriers which, according to the US administration, includes domestic taxes, currency levels and other regulations.
Come on the back of an economy already slowing: The US consumer was already showing clear signs of fatigue. The soft data has been worsening considerably as the fiscal impulse and immigration, two big supports to growth in the last 3-4 years, have both faded. In our opinion, even without tariffs, the US economy was due to go from exceptional to trend this year, a notion that wasn't at all priced in earnings. Negative earnings revisions for 2025 have unsurprisingly been coming thick and fast. From an expectation of 13% at the beginning of the year (Figure 4Iifi)MSUSsectorcontributionto3mchangn12wdearngsCemn , 2025 earnings now risk declining much lower than 6-7% earnings growth we thought they would stabilise at.
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1. AccuTrade System:
tradingview.com/v/yDFPnb1J/
2. Signal Performance:
thedailyfx.com/performance/
3. We provide Free TradingView Premium and Essential Membership.
tradingview.com/v/yDFPnb1J/
2. Signal Performance:
thedailyfx.com/performance/
3. We provide Free TradingView Premium and Essential Membership.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.