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How Wall Street Is Weathering the Tariff Storm

How Wall Street Is Weathering the Tariff Storm

Thoughts on the Market vor 1 Jahr

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Stocks hold steady as tariff uncertainty continues. Our CIO and
Chief U.S. Equity Strategist Mike Wilson explains how policy
deferrals, earnings resilience and forward guidance are driving
the market.

Read more insights from Morgan Stanley.

----- Transcript -----

Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan
Stanley’s CIO and Chief U.S. Equity Strategist. Today on the
podcast I’ll be discussing why stocks remain so resilient.

It's Monday, July 14th at 11:30am in New York.

So, let’s get after it.

Why has the equity market been resilient in the face of new
tariff announcements? Well first, the import cost exposure
for S&P 500 industries is more limited given the deferrals
and exemptions still in place like the USMCA compliant imports
from Mexico. Second, the higher tariff rates recently announced
on several trading partners are generally not perceived to be the
final rates as negotiations progress. I continue to believe these
tariffs will ultimately end up looking like a 10 percent
consumption tax on imports that generate significant revenue for
the Treasury. And finally, many companies pre-stocked inventory
before the tariffs were levied and so the higher priced goods
have not yet flowed through the cost of goods sold.

Furthermore, with the market’s tariffs concerns having peaked in
early April, the market is looking forward and focused on
the data it can measure. On that score, the dramatic v-shaped
rebound in earnings revisions breadth for the S&P 500 has
been a fundamental tailwind that justifies the equity rally since
April in the face of continued trade and macro uncertainty. This
gauge is one of our favorites for predicting equity prices and it
troughed at -25 percent in mid-April. It’s now at +3 percent. The
sectors with the most positive earnings revisions breadth
relative to the S&P 500 are Financials, Industrials and
Software — three sectors we continue to recommend due to
this dynamic.

The other more recent development helping to support equities is
the passage of the One Big Beautiful Bill. While this Bill does
not provide incremental fiscal spending to support the
economy or lower the statutory tax rate, it does lower the
cash earnings tax rates for companies that spend heavily on both
R&D and Capital Goods.

Our Global Tax Team believes we could see cash tax rates fall
from 20 percent today back toward the 13 percent level that
existed before some of these benefits from the Tax Cuts and Jobs
Act that expired in 2022. This benefit is also likely to jump
start what has been an anemic capital spending cycle for
corporate America, which could drive both higher GDP and revenue
growth for the companies that provide the type of equipment that
falls under this category of spending.

Meanwhile, the Foreign-Derived Intangible Income is a tax
incentive that benefits U.S. companies earning income from
foreign markets. It was designed to encourage companies to keep
their intellectual property in the U.S. rather than moving it to
countries with lower tax rates. This deduction was scheduled to
decrease in 2026, which would have raised the effective tax rate
by approximately 3 percent. That risk has been eliminated in the
Big Beautiful Bill.

Finally, the Digital Service Tax imposed on online companies that
operate overseas may be reduced. Late last month, Canada
announced that it would rescind its Digital Service Tax on the
U.S. in anticipation of a mutually beneficial comprehensive trade
arrangement with the U.S. This would be a major windfall for
online companies and some see the potential for more countries,
particularly in Europe, to follow Canada’s lead as trade
negotiations with the U.S. continue.

Bottom line, while uncertainty around tariffs remains high, there
are many other positive drivers for earnings growth over the next
year that could more than offset any headwinds from these
policies. This suggests the recent rally in stocks is justified
and that investors may not be as complacent as some are
fearing.

Thanks for tuning in; I hope you found it informative and useful.
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