Trade War Threat: Bank of America Predicts 8% Drop in S&P 500 Earnings

Tariff Impact on S&P 500 Earnings Could Reach 8%, Bank of America Warns

Bank of America (BofA) has issued a stark warning about the potential impact of tariffs on S&P 500 earnings, estimating that retaliatory measures from Mexico and Canada could result in an 8% hit to corporate profits. This projection comes as Wall Street braces for a possible drawdown in earnings per share (EPS) that could affect the S&P 500’s recent rally.

The bank’s analysis suggests that if 25% tariffs were imposed on Canada and Mexico, coupled with an additional 10% tariff on Chinese goods, it could lead to a 2% reduction in EPS. However, the situation could escalate further if these countries implement retaliatory measures, potentially causing the 8% decline in earnings.

This assessment comes in the context of rising protectionism under President Donald Trump’s administration, which has announced tariffs on North American trading partners and additional duties on Chinese products. The delayed implementation of tariffs on Mexico and Canada has already prompted threats of retaliation from these key trading partners.

Market analysts are closely monitoring the situation, as earnings are crucial for sustained stock growth. Goldman Sachs has projected a 2%-3% EPS reduction due to protectionism, while Barclays anticipates a 2.8% EPS decline in a full-blown trade war scenario. Sectors such as discretionary and materials face the risk of double-digit earnings fallout.

Despite these concerns, some analysts point to potential initial positive effects of tariffs, such as triggering a re-stocking cycle. Additionally, companies are reportedly better prepared for trade tensions following their experiences with tariffs in 2018, having reduced American exposure to China by over a third.

Amidst these projections, current U.S. earnings performance remains strong, with fourth-quarter results showing a 12% year-over-year increase. Wall Street sentiment is at a peak, with a high Corporate Sentiment Score indicating a potential earnings upcycle. The correlation between this sentiment score and S&P EPS growth suggests a continued earnings recovery may be on the horizon.

As global trade tensions continue to evolve, investors and corporations alike will be closely monitoring developments and their potential impact on the S&P 500’s performance in the coming months.