Citi and MS Cut S&P 500 Earnings Outlook Amid Tariff Woes

The shockwave of Trump's tariffs continues to ripple through the market, with major Wall Street investment banks issuing profit warnings. Citi's head of US equity strategy, Scott Chronert, lowered his 2025 prediction for the S&P 500 to 5,800 from 6,500, based on an earnings estimate of $255 per share for companies in the index, down from a previous forecast of $270.

Chronert stated, "No doubt, the goldilocks sentiment in place entering this year has given way to abject uncertainty." He emphasized that Trump's current reciprocal tariffs would disrupt the global trade system that has been in place since China joined the WTO in 2001. The effects are already being felt. For example, Delta Airlines withdrew its full-year financial guidance last week due to the uncertainty surrounding global trade.

At Morgan Stanley, Mike Wilson also lowered his 2025 earnings-per-share forecast to $257 from $271. While the 90-day pause on reciprocal tariffs and further concessions over the weekend reduce the near-term likelihood of a recession, Wilson noted that uncertainty remains high. He sees the S&P 500 trading within a range of 5,000 to 5,500.

Wilson warned that if the 10-year US Treasury yield spikes from its current 4.46% to above 5%, the S&P 500 could fall back below 5,000. However, he added that if the US and China reach a larger-scale trade agreement and significantly reduce tariffs, it could unlock significant upside for stocks.

In this challenging environment, Wilson recommended seeking underpriced opportunities in sectors where tariff risks are already priced in, including transportation, materials, semiconductors, automotive, pharmaceuticals/biotech, and hardware. He also advised bearish positions in areas such as consumer discretionary and staples stocks.