Trump's Tariffs Could Slash S&P 500 Fair Value by 5%, Warns Goldman Sachs
The global trade world got a rocky start to the week when President Donald Trump announced minimum 25% tariffs on imported steel and aluminum. He also wants to set import tariffs to match what other countries charge and has suggested tariffs on goods from the EU. Then there is the incremental 10% tariff on goods from China.
According to Goldman Sachs, there will be a significant impact on corporate earnings, cutting between 2% and 3% of earnings per share of the S&P 500. Considering the index as an imperfect proxy to the U.S. economy, this could create extensive setbacks to CRE interests.
Goldman economists estimate that the effective U.S. tariff rate could increase by 470 basis points. If the 25% tariffs on Canada and Mexico are ultimately implemented (they are in the middle of a 30-day suspension), the effective tariff rate could rise by an additional 5.8 percentage points.
A 500-basis-point increase in the U.S. tariff rate reduces S&P 500 earnings per share by about 1% to 2%, according to Goldman Sachs Research. The collection of tariffs could cause the EPS drop of 2% to 3%.
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“If company managements decide to absorb the higher input costs, then profit margins would be squeezed,” wrote David Kostin, chief US equity strategist at Goldman Sachs Research. “If companies pass along the higher costs to end customers, then sales volumes may suffer. Firms may try to push back on their suppliers and ask them to absorb part of the cost of the tariff through lower prices.”
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Another potential implication is a stronger dollar, which would further hurt S&P 500 earnings because the companies get 28% of their revenues from outside the U.S. During Trump’s first temp, the S&P 500 fell by 5% when the U.S. announced tariffs in 2018 and 2019.
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Also, the “historical relationship between policy uncertainty and the premium that investors demand from S&P 500 companies in return for holding their stock in times of elevated risk,” could reduce the forward 12-month price-to-earnings multiple by about 3%.
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Altogether, the fair value of the S&P 500 could fall 5% in the near term.
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“Tariff wars can impact all parties negatively and the U.S in particular by disrupting supply chains and slowing growth while driving inflation higher and disrupting labor markets,” Glenn Brill, managing director at FTI Consulting, tells GlobeSt.com. “The prospect for a stronger U.S dollar may hedge the higher cost of imports but may also impede U.S exports and constrain the inflow of foreign direct investment as dollar-denominated assets — for example, CRE — become more expensive for offshore investors.”
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Direct impacts of tariffs on CRE might be less than it seems. “The announced tariffs are likely to increase construction costs by less than 1%, depending on the specifics of the project,” Dr. Shawn DuBravac, CEO of Avrio Institute, says. “The raw steel cost for most commercial buildings is generally less than 3% of the total cost of a project. A 25% increase in the cost of an input that is 3% of total costs, would raise the cost of a project by 0.75%. For a steel bridge where 40-60% of the total cost might be steel material, a 25% increase in the price of steel could add 1-2% to the final cost.”
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Indirect costs might be the bigger issue. “If these tariffs trigger a broader trade war, supply chains tighten, prices rise, and the Fed has fewer reasons to cut rates,” Christopher Aust, president of Bering Capital Partners, tells GlobeSt.com. “That’s rough news for liquidity and deal flow in commercial real estate.”
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All this, however, assumes business as announced.
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“We’ve obviously been thinking hard about the new administration,” Ian Toner, chief investment officer of institutional investment consulting firm Verus, tells GlobeSt.com. “The general approach we’ve found that worked in the past to understand what a Trump administration is doing is to recognize that what the communication mechanism is might be different from other political administrations, but you’re typically able to identify a rationale underlying political goal and you just need to recognize the communication style is a part of the negotiation.”
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“As a negotiation, there will be wild statements up front, negotiation back and forth, and then movement toward the [goals],” Toner added. “It’s using tariffs as a more active component of policy.”
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