Policy questions and growth risks are likely to persist in the
aftermath of the Trump administration’s upcoming tariffs. Our CIO
and Chief U.S. Equity Strategist Mike Wilson outlines how to seek
investments that might mitigate the fallout.
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 – our views on tariffs and the implications for
equity markets.
It's Monday, March 31st at 11:30am in New York.
So let’s get after it.
Over the past few weeks, tariffs have moved front and center for
equity investors. While the reciprocal tariff announcement
expected on April 2nd should offer some incremental clarity on
tariff rates and countries or products in scope, we view it as a
maximalist starting point ahead of bilateral negotiations as
opposed to a clearing event. This means policy uncertainty and
growth risks are likely to persist for at least several more
months, even if it marks a short-term low for sentiment and stock
prices.
In the baseline for April 2nd, our policy strategists see the
administration focusing on a continued ramp higher in the
tariff rate on China – while product-specific tariffs on Europe,
Mexico and Canada could see some de-escalation based on the USMCA
signed during Trump’s first term. Additional tariffs on
multiple Asia economies and products are also possible. Timing is
another consideration. The administration has said it plans to
announce some tariffs for implementation on April 2nd, while
others are to be implemented later, signaling a path for
negotiations. However, this is a low conviction view given the
amount of latitude the President has on this issue.
We don't think this baseline scenario prevents upside progress at
the index level – as an "off ramp" for Mexico and Canada would
help to counter some of the risk from moderately higher China
tariffs. Furthermore, product level tariffs on the EU and certain
Asia economies, like Vietnam, are likely to be more impactful on
a sector basis.
Having said that, the S&P 500 upside is likely capped at
5800-5900 in the near term – even if we get a less onerous than
expected announcement. Such an outcome would likely bring no
immediate additional increase in the tariff rate on China; more
modest or targeted tariffs on EU products than our base case; an
extended USMCA exemption for Mexico and Canada; and very narrow
tariffs on other Asia economies.
No matter what the outcome is on Wednesday, we think new highs
for the S&P 500 are out of the question in the first half of
the year; unless there is a clear reacceleration in earnings
revisions breadth, something we believe is very unlikely until
the third or fourth quarter.
Conversely, to get a sustained break of the low end of our first
half range, we would need to see a more severe April 2nd
tariff outcome than our base case and a meaningful deterioration
in the hard economic data, especially labor markets. This is
perhaps the outcome the market was starting to price on Friday
and this morning.
Looking at the stock level, companies that can mitigate the risk
of tariffs are likely to outperform. Key strategies here
include the ability to raise price, currency hedging, redirecting
products to markets without tariffs, inventory stockpiling and
diversifying supply chains geographically. All these strategies
involve trade-offs or costs, but those companies that can do it
effectively should see better performance. In short, it’s
typically companies with scale and strong negotiating power with
its suppliers and customers. This all leads us back to large cap
quality as the key factor to focus on when picking stocks.
At the sector level, Capital Goods is well positioned given its
stronger pricing power; while consumer discretionary goods
appears to be in the weakest position.
Bottom line, stay up the quality and size curve with a bias
toward companies with good mitigation strategies. And see our
research for more details.
Thanks for listening. If you enjoy the podcast, leave us a review
wherever you listen and share Thoughts on the Market with a
friend or colleague today.
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