Stocks Are Sure to Weather Trump's Tariff Blitz. The Economy May Not. — Barrons.com
Dow Jones Newswires ·
By Martin Baccardax
Stocks are moving lower in early Friday trading, setting up a weak start to what is historically one of the toughest months of the year for global markets, following the latest slate of tariffs unveiled by President Donald Trump.
The levies, which will take effect on Aug. 7, will effectively raise the effective tariff rate to around 17%, according to Capital Economics. That is a huge increase from the 3% level that was in place last year and the highest overall burden since the early 1930s.
Stocks are likely to weather the latest tariff blitz, however, as the president has carved out framework deals with major trading partners in Europe, the United Kingdom, and Japan. Administration officials have signaled they will probably extend talks with China that could eventually result in a lower overall rate on goods from the world's second-biggest economy.
Tariffs, however, are ultimately paid by U.S. importers and passed on to U.S. consumers in the form of higher prices. And that could make the economy, which is now growing at half the pace it was last year, more vulnerable to a tariff shock than the stock market.
The S&P 500 is sitting on solid gains for the year. It has risen more than 27% from its early April lows in a searing rally powered in part by outsize gains for mega-cap tech stocks. Second-quarter earnings, despite the tariff uncertainty, have been solid.
S&P 500 companies are on pace to see their collective profits for the six months through June rise nearly 10% from last year to just over $540 billion. Similar gains are expected for the back half of the year.
Apple, Amazon.com, Microsoft, Alphabet, and Meta Platforms all posted better-than-expected earnings for the June quarter. Every one of them reiterated plans for enormous capital spending, or increased those numbers, as they seek to gain from the rollout of artificial technologies.
That bodes well for Nvidia, which closes out the summer reporting season later this month.
"Nvidia sits at the center of the tech investment universe," said Charu Chanana, chief investment strategist at Saxo Bank. "With nearly every major platform raising AI-related capex, expectations for Nvidia's second-quarter earnings in late August are extremely high."
The larger risk from the president's latest salvo is how it will affect the broader economy. Growth over the first half of the year is already markedly lower than it was over the same period in 2024. Data on spending, investment, and the labor market are trending in the wrong direction. Inflation is ticking higher, as well.
Details from the president's executive order, meanwhile, indicate that countries can avoid the new, higher tariff rates if goods are placed in transit by Aug. 7 and arrive in the U.S. by Oct. 5.
"That could trigger a brief wave of tariff front-running and should limit the speed of the pass-through to U.S. consumer prices," said Stephen Brown, deputy chief North America economist at Capital Economics.
But that will also weigh heavily on third-quarter gross domestic product. Any surge in imports will lower the overall reading in much the same way as they did over the first three months of the year, when businesses rushed to bring in goods ahead of the president's April 2 tariff announcement. Imports are subtracted from total economic output in calculating GDP.
James Knightley, chief international economist for the U.S. at ING, notes that both consumer spending and business momentum slowed over the second quarter. He says the "consumer story is critical to the outlook, given it accounts for around 70% of economic activity as measured by GDP."
He cited "anxiety over the price impact of tariffs on household spending power, worries about the outlook for jobs and uncertainty caused by big swings in asset prices and household wealth" as factors contributing to the slowdown. All of those are likely to extend into the final months of the year, lead by weakness in the job market.
The Bureau of Labor Statistics said only 73,000 new jobs were created last month, the smallest tally since October. Revisions to the data for May and June lopped another 258,000 jobs from the official payroll tally.
Challenger Gray & Christmas's benchmark report of corporate layoffs, published Thursday, showed job cuts rose by 29% last month to just over 62,000. It said that brought the year-to-date tally to just over 806,000, the highest since 2020.
St. Louis Fed data also suggests that 113,000 manufacturing jobs have been lost over the past year, while the Institute for Supply Management's July benchmark reading of activity in the sector contracted at the fastest pace in 9 months.
Forcing already cautious consumers to deal with higher prices as the job market weakens is a dangerous economic mix. The prospect of the damage it could cause is likely to shift focus firmly back toward potential rare cuts by the Federal Reserve, which has thus far resisted unprecedented pressures to reduce borrowing costs.
Bets that rates will be cut accelerated in early Friday trading following the July payroll report and the publication of arguments for easing from Fed governors Michelle Bowman and Christopher Waller.
The CME FedWatch Tool now pegs the odds of a September cut at 80%.
"Now that the bulk of earnings season is behind us, the market's next focal point is the August Jackson Hole speech, where [Federal Reserve Chairman] Powell will have the option to prepare the markets for a fall rate cut if he chooses," said Glen Smith, chief investment officer at GDS Wealth Management.
Write to Martin Baccardax at [email protected]
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Dow Jones Newswires