Stocks That Dodged the Tariff Plunge

The recent tariff plunge has sent shockwaves through global markets, but some sectors and companies have managed to dodge the downturn. European defense stocks and the "Magnificent Seven" firms in the U.S. tech sector have shown remarkable resilience, driven by specific factors that have shielded them from the broader market turmoil.



European defense stocks have been a standout performer, with Europe’s Stoxx 600 rising by 12% according to The Economist. This surge is attributed to a weakening dollar and increased defense spending by European countries. The anticipation of higher defense budgets has provided a buffer against the market downturn, making these stocks a safe haven for investors seeking stability.

On the other side of the Atlantic, the "Magnificent Seven" firms—Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla—have also demonstrated resilience. Despite the Federal Reserve’s monetary tightening and numerous geopolitical shocks, U.S. equity prices have risen by almost 60%. Year-on-year returns of over 20% have been observed in each quarter of 2024, driven by strong expected earnings and high profit margins.



The resilience of these tech giants can be attributed to several factors. Firstly, they have recorded very high realized earnings in recent years, fueling expectations of further earnings growth. Secondly, these companies have more market power and higher profit margins, at around 20%, compared to the average U.S. information technology (IT) company in the late 1990s. Additionally, they have ample cash reserves and cheap access to external financing, enabling them to invest in research and development and acquire smaller companies and competitors.

Investors have adjusted their strategies in response to the tariff plunge by shifting their investments into defensive stocks and safe-haven assets. According to Jana Grittersová, a UCR economist and associate professor of political science, "Tariff uncertainty disrupts predictability, making it difficult for firms to forecast corporate earnings, supply chain costs, and global market demand. This uncertainty discourages expansion plans and new hiring. In a volatile tariff environment, investors demand higher returns for holding riskier assets, such as equities, particularly in sectors that rely on international trade. Instead, they shift their investments into defensive stocks, such as utilities or healthcare, as well as safe-haven assets, such as gold."

Investors are using various economic indicators to identify stocks that are likely to remain resilient. For instance, the Cboe Volatility Index, also known as the "fear gauge," shows that volatility is increasing but not at red-flag levels. This indicator helps investors gauge the market's sentiment and adjust their strategies accordingly. Additionally, investors are considering the impact of tariffs on specific sectors. For example, Luman told CNBC, "We have these tariffs and much of the impact is already priced in, I would say, in stock prices, especially after last week's announcement and prior to that. The impact will be felt quickly, in terms of pricing of cars because there is limited stock. There is stock, but not for months and months. There has been some frontloading but after the stock is sold out, prices will be raised, in my view, because the margins are fairly limited." This statement highlights how investors are analyzing the immediate and long-term effects of tariffs on specific industries, such as the automotive sector, to make informed investment decisions.

While these sectors and companies have shown resilience so far, it remains to be seen whether they can maintain their performance in the face of ongoing tariff uncertainty and potential retaliatory measures. The global economy is facing a complex and evolving landscape, and investors will need to stay vigilant and adaptable to navigate the challenges ahead.