Trade Wars Would Wipe Out Tax Cut Benefit For S&P 500 EPS

This headline from Bloomberg’s lead Saturday story pretty much sums it up: “A Horror Week for the Dow Has Investors Begging for Trump Respite”.

That reminds me of something we wrote last Sunday in our week ahead preview. Recall this:

Again, I guess what I would say here is that if something goes “wrong” with all of that and we get too much President Dennison over the course of the week, it could be a toxic brew.

“Too much Dennison.” If you’re looking to place blame for this week, that’s the proximate cause right there. Too much fucking Dennison.


Trump will invariably make things worse on Twitter this weekend (he always does), it’s just a matter of which “things” he’ll make worse. As far as the trade wars go, there’s no shortage of new commentary out of China.

“A trade war between the U.S. and China will lead to a total loss of about $400 billion, taking into account the changes to cost of products, prices and supply chain,” Xinhua said on its Weibo account overnight, citing Zhu Min, a former senior official at the PBoC and the IMF. That’s apparently his “personal estimate.”

“The only major nation that seems to want to destabilize the global trading system is the U.S.,” former WTO head Pascal Lamy said, speaking at the China Development Forum in Beijing. “The big question is whether this U.S. tariff carpet bombing is to open a negotiation or destroy the system,” he added, before noting something that is obvious to everyone but the populist/nationalist contingent: “Giving into protectionist pressure will harm us all.”

And then there was a not-so-subtle message from the People’s Daily, where a front-page commentary reads as follows:

A trade war between China and the U.S. will cause the most damage to U.S. multinationals, including Apple Inc., Boeing Co. and Intel Corp., which rake in huge revenue from China every year. Trade war will damage the U.S. economic recovery.

Right. And that right there is something that Donald Trump and Peter Navarro and Wilbur Ross’s animate remains don’t seem to grasp. But Barclays grasps it. “We estimate that an across the board tariff of 10% on all U.S. imports and exports would decrease 2018 EPS for S&P500 by ~11% and thus completely offset the positive fiscal stimulus from tax reform,” the bank writes in a new report.

The bank goes on to try and quantify the effect in a series of simulations, starting with the following chart which shows you the likely downstream effects of the steel and aluminum tariffs across sectors:


Here’s how they get to the bit above about the trade war offsetting the benefits of the fiscal stimulus:

For simplicity we provide estimates based on a uniform 10% tariff on U.S. exports (by U.S. trade partners) and all U.S. imports (by U.S. in retaliation). The results can then be easily scaled for different tariff assumptions. Under these assumptions we find that trade tariffs will hurt the S&P 500 2018E EPS by ~11.0% (Figure 4). This compares with our estimate of a ~7.3% positive impact of fiscal stimulus from tax reform. Thus an all-out “trade war” could potentially offset the positive impact of fiscal stimulus from tax reform.


And the cruel irony comes in the next section (note the bolded bit):

Figure 4 illustrates the potential impact across all U.S. sectors in the case of an escalation of trade tensions between U.S. and all its trade partners leading to a global trade war. Among U.S. sectors, Energy (XLE) and Industrials (XLI) appear to be particularly vulnerable to such a global trade war scenario because of their significantly integrated position in the global value chains. We highlight the fact that the negative impact of U.S. imposition of tariffs on imports on U.S. is actually higher than the impact of a tariff by the trading partners on US exports. This highlights the fact the global nature of the current supply chains due to which a significant portion of U.S. companies will likely be hurt by imposition of tariffs on imports. This illustrates that the un-intended consequences of the tariffs imposed by the U.S. on U.S. companies are non-trivial. We emphasize however that our framework does not incorporate the market share gains that U.S. companies will derive from foreign companies whose products will become less competitive.

This is what people mean when they try (largely in vain) to explain why this is not only a bad idea, but a profoundly stupid one. It’s almost unconscionable that the administration isn’t even endeavoring to tell the public about the myriad potential knock-on effects of this for corporate America. Here’s the breakdown from Barclays that shows how each country’s retaliatory measures would hit S&P sectors’ earnings:

Figure 6 illustrates the geographical breakdown of the potential impact on 2018E EPS due to a 10% tariff on all U.S. exports (by U.S. trade partners) across sectors and trading partners. While trade retaliation from Europe or NAFTA members will have a broader impact on the profitability of S&P 500 companies, Industrials (XLI) are most exposed to retaliation by China.


Finally, here’s that breakdown in reverse or, as Barclays describes it, “this is the geographical breakdown of the potential impact on 2018E EPS due to a 10% tariff on all U.S. imports (by the U.S. in response) across sectors and trading partners”:


None of this even accounts for the potential knock-on effects on sentiment and what that would mean for hiring, investment etc. etc.

Plus, do note that all of this suggests a rather grievous hit to global growth, which is of course one pillar of the “Goldilocks” narrative we all count on to preserve whatever’s left of the low vol. regime.

In short:



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9 thoughts on “Trade Wars Would Wipe Out Tax Cut Benefit For S&P 500 EPS

  1. Just stumbled upon your H site … love it. Heard on CNBC this week (don’t recall the source CEO of something) in response to question “What’s the most threatening thing to the Stock Market stability in the near future?” response “The change in control of the House from R to D would cause ‘chaos’ in both political and economic systems.” I wonder how inevitabile that is? To heck with tariffs. r.

    1. Current polling is giving a “generic democrat” an over 10% advantage over a “generic republican” heading into the midterms. We’ve also seen democrats win a number of special elections in the house and senate in states/districts that went to Trump by large margins. Also, a significant number of republican incumbents have announced their retirement ahead of the midterms. Finally, we’ve historically seen a newly elected President’s party lose seats in the next midterms. This would all suggest that there is a significant chance of the democrats picking up enough seats in the House to take control after the midterms.

      As far as the likelihood of political and market chaos goes, I think that ship has sailed. This is arguably the most dysfunctional administration in modern history and the market has certainly become increasingly chaotic over the last few months. In 2018, we’ve gone from being in one of the longest periods without a 5% drawdown, and having historically low market volatility, to having two 5+% drawdowns in the last several weeks. Currently, the S&P is down 10% from January’s high, I think that would qualify as a little bit of chaos as compared to the last 9 years of this market cycle.

  2. The risk not even being factored is China stopping buying UST. Their Commerce Secretary made it clear the counter tariffs were the tip of the iceberg. What do I think is underwater? The UST support China has provided – they could single handedly destroy the debt auctions if they chose by unloading UST, and stopping buying. At a time when $1.8 T is being issued – who would think that may provide a bit of a drag on earnings?

    1. China has already stopped; they have been in a stall pattern since 2012 if you look at the data. The most interesting part of the China UST holdings is that they bought $0.8T from 2008 through 2010, essentially in their mind bailing the US out of the financial crisis. Think about that for a moment. China, which with all due respect is a lesser economic power than the US, believes it bailed the US out of the financial crisis (of course in exchange to get Apple to produce I-Phones in China so they could steal the intellectual property). Or maybe they caused the crisis? and, are about to cause the next one so Americans will preserve the warped trade deficit driven economy that has been put in place over the last 30 years for the purpose of spreading capitalism throughout the emerging markets in the word. The insanity of the plan, however, was that we are now indebted to China instead of the other way around, and the American financial system, not its people, is addicted to the process..

      The problem needs to be fixed. If you follow the fair weather Wall Street crowd, it never will be before it is F’d up beyond repair. All that is needed is trade balance and the American economy will begin to grow again.

      1. From what I’ve seen they were net buyers in 2017, getting back up to 2010 levels, or close anyway. Still holding $1.2 trillion. If they simply stop buying it would not have a material effect, but if they started selling, it could. Fed selling, US Gov’t selling, China selling – who’s buying?

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