The S&P 500 index earnings per share could be cut by 2-3% if Trump ultimately follows through and implements sustained tariffs on exports into the US.
This is according to Goldman Sachs’ chief US equity strategist David Kostin, who warned that every 5% increase in tariffs reduces S&P 500 earnings per share by 1-2%.
Financial markets have been whipsawed in recent days trying to digest the long-term impact of potential US tariffs.
Amongst those that were recently considered includes a 25% tariff on imported goods from Mexico and Canada (energy imports from Canada would be subject to an incremental 10% tariff) and an incremental 10% tariff on imports from China.
Tariffs on the EU have also been suggested, as well as other Asian countries with large trade imbalances with the US, such as Vietnam and Japan.
Kostin said: “If company managements decide to absorb the higher input costs, then profit margins would be squeezed.”
“If companies pass along the higher costs to end customers, then sales volumes may suffer. Firms may try to push back on their suppliers and ask them to absorb part of the cost of the tariff through lower prices.”
Tariffs could also potentially drive up the value of the dollar, according to Goldman’s foreign exchange analysts, which would in turn further weigh on the earnings of S&P 500 companies, which derive 28% of revenues outside the US.
The firm estimates that holding all else equal, a 10% increase in the value of the trade-weighted dollar would reduce S&P 500 earnings per share by roughly 2%.
During Trump’s last presidency, the S&P 500 index fell by 5% on days when the US announced tariffs in 2018 and 2019, and fell by 7% when other countries announce retaliatory tariffs.
The additional uncertainty created by the potential trade tariffs could also raise the premium investors demand from S&P 500 companies, according to Kostin.
He warned it could reduce the forward 12-month price-to-earnings multiple by around 3%.
He also noted that tariffs could lead to higher interest rates, weighing on equity valuations, as increasing bond yields make stocks look less attractive.
In the near term, Goldman models suggest that the S&P 500 index could decline as much as 5% should sustained US tariffs take place.
