Tariffs – have markets over-reacted?

Following a sell-off that began in mid-February, stock markets’ recent bounce reflects some hopes that, despite the President’s bluster, some pragmatism may be setting in as policymakers and companies react to the uncertainty.

30 April 2025

The S&P 500 Index is down nearly -10% since its mid-February peak, with early April’s so-called ‘Liberation Day’ seeing significant falls and prompting a flurry of downward growth and earnings forecasts around the world. However, this figure hides the fact that the market is up nearly +8% from 21 to 29 April. The market’s recent recovery suggests that investors are drawing comfort from a number of sources.

Reasons to be less fearful (if not exactly cheerful)

Firstly, the instigator of the tariffs himself, President Trump, appears to have taken fright and put in place a 90-day reprieve for most countries.

Second, the Federal Reserve (Fed) has been dropping hints that it may need to cut rates, with Cleveland Fed President Beth Hammack stating last week that rates could be cut as soon as June if the economy shows signs of deterioration.

Thirdly, the President is seeking to rebuild support for his economic agenda by framing the tariffs as a precondition to offset the cost of proposed tax legislation. Specifically, this is about the extension to the 2017 tax cuts but with additional popular goodies, including removing tax on tipped wages, social security and overtime pay.

Still, expensive tax cuts could trigger an even riskier tariff ‘double-down’

But this is where things start to become less convincing. The bill for the tax cut extensions, according to the Congressional Budget Office, would be a staggering USD 4.6 trillion and implicitly provides a very strong incentive for the administration to double down on tariff policy as a somewhat unusual source of recurring government revenue, a connection that markets perhaps have not yet made.

First consumers, and now corporates, are feeling the uncertainty

There is even less ambiguity about what is starting to happen in corporate America. In a possible sign of things to come in this busy week of earnings releases (fully 50 S&P 500 stocks are due to report), Snap shares tumbled after the messaging app company refused to issue a sales forecast given the prevailing economic uncertainty. America Inc. has enjoyed strong earnings growth in recent years (see chart) and it will be sorely hoping for some more certainty and clarity in the weeks and months to come. Failing that, interest rate cuts couldn’t come at a better time. The closely-watched Core Personal Consumption Expenditure inflation figure comes out later today – a reading of 2.6% or below may well give the Fed the excuse it needs to try and avert an economic and earnings slowdown.

Earnings per share from 31 Dec 2003 to 29 Apr 2025