By A tit-for-tat trade war between the US and its neighbors could spell real trouble for S&P 500 earnings.
If US tariffs on Canada, Mexico, and China spark retaliation, the benchmark index could suffer a serious hit to earnings per share, Bank of America estimated this week.
“We estimate that 25% tariffs on Canada and Mexico plus 10% incremental tariffs on China translates into a 2% hit to EPS, all else equal (1.7% from Canada & Mexico and 0.3% from China),” analysts at the bank wrote. “However, if it escalates into bilateral tariffs, we estimate an 8% hit to EPS assuming unitary elasticity.”
Given Washington’s rising protectionism, this risk isn’t far-fetched. Just weeks into his presidency, Donald Trump has announced tariffs on US North American trading partners and has levied an additional 10% duty on Chinese products. Though tariffs on Mexico and Canada have been delayed, the initial announcements sparked promises of retaliation from both countries.
A trade war could derail market returns for the S&P 500, considering that earnings are a key engine of growth for stocks, though few other banks on Wall Street have projected EPS fallout to be as deep as what BofA is implying.
In a recent note, Goldman Sachs estimated Trump’s protectionism could slash EPS by 2%-3%, as a five percentage point increase in the tariff rate typically lowers S&P earnings by 1%-2%.
This, in turn, would drag the stock market down 5%.
Meanwhile, in December, Barclays outlined that a full-blown trade war between the US and its continental trading partners would amount to a 2.8% decline in EPS. Double-digit earnings fallout could loom over the discretionary and materials sectors, given each group’s production presence in Mexico and Canada.
Putting aside the threat of a trade war with these two countries, BofA outlined that tariffs could initially play a positive role, by igniting a re-stocking cycle.
Companies also appear more prepared for trade tensions since 2018, given that Trump’s first-term tariffs have not been erased. Meanwhile, American exposure to China has been reduced by over a third.
Ahead of any tariff disruptions, US earnings are coming in strong, and fourth-quarter results are up 12% year-over-year. Wall Street sentiment peaking, and mentions of industry “bottoms” are soaring — a signal that cyclically depressed sectors are verging on an earnings recovery.
“Our Corporate Sentiment Score soared to the highest level in its history (since 2004). This indicator has led S&P EPS YoY (69% correlation with a quarter lead), suggesting a continued upcycle in earnings,” analysts wrote.
