How Trump's Tariffs Could Pressure U.S. Stocks?

Trump is once again wielding the tariff stick. How will this impact the U.S. stock market?

One way stocks may come under pressure is that large tariffs pose downside risks to the S&P 500, earnings estimates, and return expectations, according to Goldman Sachs.

Goldman Sachs points out that tariffs would lead to increased production costs for companies. If companies absorb these costs themselves, profit margins would suffer; if they pass the costs onto customers, product sales would decrease. According to Goldman's estimates, a 5% increase in U.S. tariff rates would cause a 1% to 2% decline in the S&P 500 companies' EPS. Trump has paused tariffs on Canada and Mexico, but if these tariffs are reinstated, it could lower the S&P 500's expected EPS by 3%, not including the additional impact of tightening financial conditions and the potential shock to consumer sentiment.

Another way equities may be pressured is that investor anxiety could weigh on stock valuation multiples. Goldman Sachs states that the historical relationship between policy uncertainty and the S&P 500 equity risk premium suggests that the recent increase in uncertainty could reduce the forward 12-month P/E multiple by about 3%, holding all else constant. The S&P 500's forward P/E multiple is currently around 22, which is well above its historic average in the high teens.

Trump's increase in tariffs is also likely to lead to a stronger U.S. dollar, which would impact corporate profit margins because a large portion of U.S. companies' revenues come from outside the U.S. 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 Sachs.

Goldman Sachs warns that the market has not fully priced in the potential impact of tariffs. If tariffs are ultimately implemented, the fair value of the S&P 500 could fall by 5% in the short term.