Another Monday, another swaying of the world market. Trump’s Tariff Tumble is the topic of discussion this week, following the DeepSeek Dive a week ago.
The president’s decision to impose tariffs on some of the nations with which the United States has significant trade imbalances has surprised traders. The European Union might follow China, Mexico, and Canada.
The Goldman Sachs graphic below illustrates how the prediction markets did not take the tariff threat seriously in the latter part of last week, which prepared the way for today’s response.
Additionally, Goldman strategists under the direction of David Kostin laid out the ramifications of Trump’s most recent action for the equity market in a report released on Sunday.
According to Goldman, one factor that could put pressure on markets is the possibility of negative returns and profit predictions for the S&P 500 SPX due to high tariffs.
“Profit margins would be squeezed if firm management chose to absorb the higher input costs. Sales volumes may decline if businesses pass on the increased expenses to their final consumers, according to the Wall Street bank.
According to their estimates, S&P 500 earnings per share would decrease by about 1% to 2% for every 5% increase in the U.S. tariff rate.
“As a result, if sustained, the tariffs announced this weekend would reduce our S&P 500 EPS forecasts by roughly 2-3%, not taking into account any additional impact from major financial conditions tightening or a larger-than-expected effect of policy uncertainty on corporate or consumer behavior,” says Goldman Sachs.
It should be mentioned that the economists at the bank continue to believe that the tariffs on Canada and Mexico will only last temporarily.
Stock valuation multiples may be impacted by investor worry, which is another way that stocks may be under pressure. According to Goldman, the economic policy uncertainty index spiked to its highest percentile level in the previous 40 years, as seen in the chart below.
“The historical relationship between policy uncertainty and the S&P 500 equity risk premium suggests that the recent uncertainty increase should reduce the forward 12-month P/E multiple by about 3%, holding all else constant,” Goldman states. Recall that the forward P/E multiple for the S&P 500 is currently at about 22, which is significantly higher than its historical average in the upper teens.
However, the impact on equities may be more complex when higher borrowing costs are implemented in response to inflation worries. Indeed, worries about the harm that tariffs will do to the forecast for economic growth may reduce longer-term yields, while the more monetary policy-sensitive short-end of the yield curve may rise.
Additionally, Goldman believes that the impact of a dollar increase in short-term Treasury yields on the overall profitability of the S&P 500 may be minimal. Less than 1% of S&P 500 businesses’ total revenue comes directly from Mexico and Canada, but 28% of their total revenue comes from sources outside the United States.
“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%,” writes Goldman Sachs.
Overall, though, the tariff plan is bad for stocks. “Combining these modeled EPS and valuation sensitivities suggests near-term downside of roughly 5% to S&P 500 fair value if the market prices the sustained implementation of the newly-announced tariffs,” Goldman Sachs states.
The harm would be less if investors thought tariffs were a temporary step toward a negotiated settlement. However, if traders believe that the most recent announcements indicate a higher likelihood of further escalation, stocks may decline even more.
High expectations for economic and profits growth, according to the strategists, highlight the possible negative risk to stocks in the event that investors are compelled to reevaluate the underlying outlook.
