Q3 earnings: The case against Trump’s tariffs plan
|In the two weeks since the US election, the focus is firmly on Trump’s economic policy and the ramifications it will have for the rest of the world. The focus has been on tariffs. Trump is a keen proponent of tariffs; however, he may want to tread carefully when it comes to their application.
Internationally exposed firms on the S&P 500 outperform
Companies listed on the S&P 500 that generate more than 50% of their earnings and sales overseas have outperformed companies that generate more than 50% of their revenues domestically, according to analysis from FactSet. Companies that generate most of their earnings overseas saw an earnings growth rate of 12.9% in Q3, vs. a 1.5% growth rate for companies that generate most of their earnings domestically. Revenue growth was also stronger for companies that generate most of their revenues overseas vs. generating most of their revenues at home, at 6.1% vs. 5.3%.
S&P 500 mega caps are driving the index
The outperformance of S&P 500 companies with international exposure was driven by Pfizer, Meta, Nvidia and Google. These are some of the biggest firms in the S&P 500, and they account for most of the earnings growth. If Trump’s tariffs plan damages the earnings of these companies, or if retaliatory tariffs on US companies threaten their earnings and sales growth, then the S&P 500 could suffer.
On aggregate, 41% of S&P 500 revenues are generated overseas, thus Trump is playing a high stakes game with his tariffs plan, and the main US blue chip index is the pawn.
Tariffs could threaten the S&P 500
Some analysts have noted that President elect Trump’s main barometer of economic strength is the S&P 500. Thus, he may tone down his tariffs plan, or give exemptions to the biggest international firms on the index, if he wants to see the S&P 500 continue to move higher.
The chart below shows earnings per share estimates for 2024 and 2025 for the S&P 500. EPS estimates for 2025 are higher than for 2024, which suggests that analysts currently see S&P 500 companies getting more profitable in the coming months. If Trump’s tariffs plans come into effect next year, then we could see a sharp downgrade in these expectations, which may knock confidence in the US’s blue-chip index.
S&P 500 EPS estimates for 2024 and 2025
Source: XTB and Bloomberg
Why Trump’s Treasury Secretary pick is vital for US stocks
The market’s focus is now on Trump’s choice of Treasury secretary. In recent days, this has shifted to a joint headship between Kevin Warsh and Scott Bessent. Bessent is an interesting choice, the hedge fund manager has been a proponent of free trade in the past. Thus, the fact that Trump is considering him for this position, could mean that fears about Trump’s tariffs are overdone.
Free trade and international markets are vital for the biggest companies on the S&P 500. Without their robust earnings performance, the S&P 500 could sag. If Trump does choose a Treasury Secretary who has a bias for free trade, this could ease global fears about the extent of Trump’s tariffs plans once he takes office in January.
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