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Equity Thematic Strategy_ Impact of Tariffs on Global Equities. Wed Feb 05 2025
Federal Reserve·2025-02-09 04:54

Summary of Key Points from the Conference Call Industry Overview - The conference call discusses the impact of tariffs on global equities, particularly focusing on the dynamics between the United States and its key trading partners, including Mexico, Canada, the European Union, and China [2][3][4]. Core Insights and Arguments - Tariff Baskets: J.P. Morgan has launched 11 new equity tariff baskets in collaboration with global equity strategists and analysts, covering approximately 1,000 companies to help investors navigate trade turbulence [2]. - Current Tariff Situation: The effective tariff rate on US imports is historically low at around 2.4%. However, proposed tariffs could significantly impact S&P 500 earnings, with an estimated EPS impact of ~20,potentiallyerasingtwo−thirdsofnexttwelvemonths(NTM)EPSgrowth[3][4][28].−∗∗SectorExposureChanges∗∗:−MexicohasincreaseditsexposuretotheUSAutoandIndustrialsectors,whileCanadahasseenadeclineinAutosectorexposurebutgrowthinNaturalResources[3][13].−China’sleadingexportsectorhasshiftedfromTechnologytoDiscretionaryRetailduetotariffimpacts[3][13].−TheEU,whilelargelyunaffectedinthecurrentround,hasasignificanttradesurpluswiththeUS,whichmaybecomeanegotiationtarget[3][4].−∗∗MarketVolatility∗∗:Themarketisexpectedtoexperiencesuddenboutsofvolatilityfollowedbyrecovery,withhighstockdispersionbeingaconsistentfeaturein2025[2].AdditionalImportantInsights−∗∗CorporateSentiment∗∗:NegativesentimenthasbeenobservedintheTechnologyandMaterialssectors,withanotableshiftfromthepreviousadministration′sfocusontheIndustrialssector[10].−∗∗ConsumerImpact∗∗:Theimplementationoftariffscouldleadtoanestimatedannualcostof20, potentially erasing two-thirds of next twelve months (NTM) EPS growth [3][4][28]. - **Sector Exposure Changes**: - Mexico has increased its exposure to the US Auto and Industrial sectors, while Canada has seen a decline in Auto sector exposure but growth in Natural Resources [3][13]. - China’s leading export sector has shifted from Technology to Discretionary Retail due to tariff impacts [3][13]. - The EU, while largely unaffected in the current round, has a significant trade surplus with the US, which may become a negotiation target [3][4]. - **Market Volatility**: The market is expected to experience sudden bouts of volatility followed by recovery, with high stock dispersion being a consistent feature in 2025 [2]. Additional Important Insights - **Corporate Sentiment**: Negative sentiment has been observed in the Technology and Materials sectors, with a notable shift from the previous administration's focus on the Industrials sector [10]. - **Consumer Impact**: The implementation of tariffs could lead to an estimated annual cost of 2,000-$3,000 per household, particularly affecting low-end consumers who are already under pressure [12][33]. - Trade Interdependence: The interconnectedness of the US, Mexico, and Canada means that escalating trade tensions could pose significant challenges to their economies, especially for Mexico and Canada, which rely heavily on US exports [13]. - Closing of De Minimis Loophole: The potential removal of the de minimis exemption could lead to higher prices for consumer goods, significantly impacting e-commerce and retail sectors [14]. Conclusion - The evolving landscape of tariffs and trade policies presents both risks and opportunities for various sectors and companies. Investors should closely monitor these developments to assess their potential impacts on earnings and market dynamics.