(Bloomberg) -- Former US President Donald Trump’s proposal for steep tariff hikes would have detrimental impacts on earnings of companies on both sides of the Atlantic, Barclays Plc strategists warned.
A universal 10% tariff on imports from all countries, together with a 60% or higher tariff for goods from China, would shave 3.2% off S&P 500 companies’ earnings in 2025. Their profits could drop by another 1.5% if other countries retaliate with similar measures, the strategists estimated.
The impact for European companies, however, could be even more severe. A “full-blown trade war” could result in a “high single-digit” drag on European companies’ earnings growth, Barclays said. Analysts on average expect members of the Stoxx Europe 600 Index to increase earnings by 8.5% next year, according to data compiled by Bloomberg.
In the US, companies within the materials, consumer discretionary, industrials, technology and healthcare sectors appear most at risk due to their dependence on global supply chains, according to the strategists.
In Europe, Italian and German companies that make transport equipment, automotive products, beverages and chemicals may take a harder hit, given their contributions to the European Union’s trade surplus with the US.
“Trump policies will fuel growth, drive down inflation, inspire American manufacturing, all while protecting the working men and women of our nation from lopsided policies tilted in favor of other countries,” Brian Hughes, senior advisor in the Trump campaign, said in a statement.
“Just like 2016, Wall Street forecasts said that Trump policies would result in lower growth and higher inflation,” he said. “Actual growth and job gains widely outperformed these opinions.”
Ripple Effects
Even though the direct impact from tariffs may be limited, a ripple effect caused by higher prices and slower economic growth would likely cause more damage to companies, the strategists warned.
“While the new proposed tariffs would have a modest direct negative effect on corporate earnings if implemented, the second-order effects from higher cost inflation and slowing economic growth would be an incremental headwind,” they said.
Stocks aside, Barclays said yields on long-term Treasuries may fall as tariffs curb growth, while the dollar could strengthen by at least 3% to 4% against a basket of other major currencies, should a blanket 10% tariff on all US goods imports be implemented without retaliation.
Barclays currency strategists noted that the impact of US tariffs will be felt the most by those economies with whom it has large trade surpluses, like China, instead of more balanced relationships, like the eurozone. The renminbi could depreciate by some 3% if the US were to impose 60% tariffs on Chinese imports, even assuming China retaliates, they wrote.
Treasury Yields
The front end of the yield curve could sell off as a potential rise in inflation slows the pace of Federal Reserve interest-rate cuts. But so far, the market is pricing in a low likelihood of aggressive price shocks, the strategists said, as a gauge of five-year inflation expectations is trading around the lowest levels since 2020.
Still, Barclays strategists noted that at the long-end of the Treasury curve, the economic hit from tariffs could ultimately drag down yields as markets build in lower growth expectations — and ultimately more Fed easing further down the line. Assuming 60% tariffs on Chinese goods imports and 10% on the rest of the world, the real US economy could be hit by as much as 1.4 percentage points, they noted.
In credit markets, US investment-grade paper in sectors such as pharmaceuticals, aerospace and defense, building materials and retail is “highly exposed” to tariff increases, although not currently pricing in much risk, they said.
In Europe, while investment-grade credit “might initially struggle with higher rates volatility,” a growth shock would hit high-yield issues, along with cyclicals and autos in both categories, they added.
--With assistance from Esha Dey.
©2024 Bloomberg L.P.