Trump Tariffs Rattle Markets

4/4/2025

 

Last week President Trump enacted tariffs (an import tax) on goods from nations around the globe in an effort to provide a very meaningful incentive for American companies to use domestic resources to create goods and services. Stock markets around the globe sold off 5-20% on the news. This policy shift on international trade marks the most significant change in global trade of the past century. The markets’ negative response to this policy change is driven by numerous factors. The most significant of which is simply uncertainty. The number of American businesses that have depended on imports and the price of those imports being affordable is vast. The immediate concern for investors is that the profit margins for businesses with now higher import costs will be reduced or negated altogether (until domestic providers ramp up to provide for previously imported goods or natural resources at economical prices).

While it’s hard to say if President Trump’s theory on taxing imports will ultimately produce a healthier US economy or not, it’s clear that corporate earnings for the next 12 months for most established large US companies will likely be lower. With higher input costs causing higher prices to consumers, sales of goods and services are expected to decline in the short term, creating lower earnings for companies. Because the current price of a stock sells for a multiple of its annual earnings, this is the reason for the immediacy of the overall stock market sell-off. Without historical context to project the extent of the slowdown of corporate earnings resulting from the tariffs, behavioral economics suggests that investors tend to oversell stocks in the moment to protect against unknown earnings slowdowns in the future. 


IS THERE A SILVER LINING? YES
For many industries, this is the beginning of a transition to a government-induced incentive for companies to manufacture, produce, and build goods and services here in the USA. (Many would actually consider this a mandate, more than an incentive.) There are many industry sectors that may benefit from this opportunity if they can execute well on their business plans to expand operations in these sectors. Industry groups like robotics, steel production, auto production, natural resource extraction, apparel manufacturing, textiles, etc. all just got a tailwind of a lifetime to increase workforce, ramp-up operations, and prepare for a massive increase in demand. There are very meaningful investment opportunities in these areas.
 
For the markets, this is a moment where long-term investors may have the opportunity to invest in quality companies at prices that do not reflect the real strength of future corporate earnings. Consider that markets tend to price stocks today on a multiple of earnings over the next 12-18 months. With this current policy shift, most of the attention and discussion is focused on the immediate impact of higher import costs, and resulting short-term potential decline of corporate earnings. There is very little discussion or assumption of these increased input costs being offset by a ramp-up in American produced goods and materials. For those who understand that American entrepreneurial leaders and innovators have worked to build strong, profitable businesses for decades given whatever government policies are mandated at different moments in time, it’s clear that the knee-jerk reaction to a policy change is not considering what positives can come from this change.

Our culture’s resistance to change makes it difficult to consider that the change could be good. It could turn out to be a mistake to bet against the talent of those business leaders who will take advantage of this once-in-a-lifetime opportunity to re-ignite “built in America” brands. We have no crystal ball to tell us how this plays out in the short run. Chances are that the vocal social response to this policy change will be a louder voice than the quiet, steadfast business leaders of tomorrow who quickly adapt to the new rules and figure out how to increase profits in the new landscape of made-in-America businesses. It will be important for long-term investors to remain focused on buying quality companies at good prices, and not just the voice of the media through this period.  

 

THIS CORRECTION IS HEALTHY
From a valuation standpoint, this pullback in stock prices is very healthy for investors. We just spoke at our client gathering in February about how the top companies in both the S&P500 and the NASDAQ were trading at nearly 30x annual earnings on excessively optimistic belief that AI would soon propel corporate earnings to unprecedented levels. That said, investors paying 30x annual earnings generally understand the risk that comes from paying so much for their ownership claim on future earnings. One must realize that, when it is going to take 30 years to recover their stock investment with company earnings, major price corrections and volatility are to be expected when short-term investor sentiment changes. When widespread optimism drives stock prices to unreasonably high prices, it's common for a current event to be the trigger to run the speculators out of the market, resulting in more "normal" prices stocks. With the nearly 20% pull back in prices of some of the high-flying stocks this week, we are getting back into a range of more reasonable prices (in the 20x-24x earnings range). This is such a noteworthy point, because this valuation issue probably has more to do with the magnitude of this market correction than the actual news of the tariffs.
 

The BOTTOM Line:
For long-term investors, stock market volatility is always an opportunity to buy shares at lower prices. History shows repeatedly us that these periods of political-induced volatility are normal and have consistently come and gone inside of a year or two with only a few exceptions.  

For shorter-term investors, we have worked diligently in the last year to increase allocation to more value priced stocks, fixed income and real estate, and to decrease exposure from more volatile growth stock sectors. Although none of us are completely insulated from a global stock market sell-off, our more conservative clients have far fewer stock holdings negatively impacted by this current event.

If you have questions or concerns, our team is here for you. Feel free to reach out anytime.