Tariff News Again
Key Takeaways
Get ready for another round of news headlines about tariffs as we head to the 1 August implementation for countries which have not negotiated with the US yet.
Whilst we should reasonably expect increased volatility around this uncertainty, markets have been relatively well behaved so far.
Commentators noted that tariffs could lead to reduced consumer spending and hence lower corporate earnings, but most US companies have reported better earnings than expected.
It is possible that demand was pulled forward because of the tariffs, or that Trump’s new tax cut bill provided the boost that corporations needed. With positive momentum and trend indicators having triggered, we’re expecting more positive results than negative ones.
With the majority of the tariff pauses ending this week, expect tariff news to come to the fore again.
President Trump noted that the US planned to start sending letters this week to trade partners, dictating new tariff rates ahead of the 1 Aug implementation.
What are the recent changes since the initial April announcement of the tariffs, which ignited a global trade war?
As a quick recap — the tariff rates affect prices of goods which are imported into the US. As a result, potentially impact US consumer prices, which could then lead to higher inflation and reduced spending. Consequently, these could affect US corporate earnings.
The good news so far is that the majority of US companies have reported better earnings than expected and beyond that, also forecasted positive next quarter earnings (chart below).
However, these positive reports could be the result of demand that was pulled forward in advance of tariffs and this will have to be monitored to see what happens over the year.
In addition, over the weekend, Trump passed his controversial budget bill — a bill that extended tax cuts at the expense of other federal spending.
With the upcoming tax cuts likely to provide a boost to US corporates, this might very well offset the impending tariff costs, as suggested by this analysis from Empirical Research shown in the chart below. The visual shows that for some sectors, there could be a positive net revenue boost, outweighing the drag of the tariffs.
What could we expect from markets over the next couple of months?
The probability that we see decent global market gains over the next few months is pretty high, as positive momentum and trend indicators have been triggered.
In addition, data that measures price, investor sentiment, earnings, bond yields, and economic activity have recovered from the April weakness, and are trending in the positive zone now.
However, we would like to temper some enthusiasm with the fact that we are headed into the traditionally weaker months for the stock market — what investors may term as ‘seasonal weakness’. The chart below shows that September typically offers the lowest returns on average for stocks, with April being the best month of the year. However, is it possible that this year the script could be flipped, given that April was a tumultuous month? Anything is possible.
We will likely see a little bit more volatility during the next few months as tariffs once again dominate the front pages of the news. But, with the majority of indicators highlighting favourable market conditions ahead, it is likely that we will see more positive outcomes than negative ones.
