Client Newsletter Example: The Most Important Newsletter You May Read All Year - April 2nd and the Potential Impact of Tariffs On Equities This Year and Beyond
Published on March 26, 2025 @ 6:42am
Today's newsletter edition strictly focuses on questions we're assuming everyone wants answers to right now: April 2nd, the impact that tariffs are likely to have on US equity markets in the weeks/months to come, as well as our neighbors, Canada and Mexico. Here's the facts and our analysis regarding all of it at the end:
The Most Important Newsletter You May Read All Year - April 2nd and the Potential Impact of Tariffs On Equities This Year and Beyond
There's a lot of opinions out there right now regarding the impact that tariffs are going to have on US and global equities in the weeks/months to come, so rather than simply adding to the opinion pot, I decided to focus today's edition on providing everyone here with a foundation of facts, some recent history on the topic, and, more importantly, what it may all mean for traders and investors going forward.
Grab a cup of coffee or your favorite beverage, this is a long one, but one that we do believe provides a very detailed and "best effort" predictive lay of the land for equities over the next eight months and beyond.
April 2nd, 2025 (a week from today), has emerged as a significant date in U.S. trade policy due to President Donald Trump's plans to impose a sweeping set of "reciprocal tariffs" on that day, which he has dubbed "Liberation Day." This initiative stems from his administration's strategy to address perceived imbalances in international trade by matching or countering tariffs and trade barriers imposed by other countries on U.S. goods. The importance of this date lies in its potential to reshape global trade dynamics, impact the U.S. economy, and influence relations with key trading partners.
The Trump administration has signaled that on April 2, it intends to roll out tariffs designed to mirror the rates foreign nations charge on American exports, alongside possible sector-specific levies on industries like automobiles, steel, and aluminum. Treasury Secretary Scott Bessent has outlined that each country will receive a "number" reflecting their tariffs, non-tariff barriers, and other trade practices (e.g., currency manipulation or labor suppression), with negotiations offered to avoid a "tariff wall." This approach aims to shrink the U.S.'s $1.2T goods trade deficit and bolster domestic manufacturing, though the scope has reportedly narrowed from initial threats, focusing on a subset of countries with significant trade surpluses--referred to as the "Dirty 15" by Bessent.
The date's significance is heightened by its timing and context. Since Trump's inauguration in January 2025, he has already imposed tariffs on over $800B in imports from China (20%), Canada, and Mexico (25% on non-USMCA goods), causing market volatility and recession fears. The April 2 escalation, potentially covering "trillions" more in imports, represents a dramatic expansion, though recent reports suggest flexibility--some countries might get "breaks," and sector-specific tariffs (e.g., autos) could be phased in later. Trading partners like the EU, Canada, and Mexico have delayed retaliatory measures into April, hoping for negotiations, which adds diplomatic weight to the deadline.
Economically, April 2 could mark a turning point. The OECD warns these tariffs may slow growth in the U.S., Canada, and Mexico while driving inflation, with U.S. households facing estimated annual losses of $2,700-$3,400 due to higher costs and retaliation. Markets have rallied on signs of a softer stance, but uncertainty persists as Trump's team debates legal authority (possibly via the International Emergency Economic Powers Act) and logistical challenges, given the complexity of tailoring rates to hundreds of nations.
In short, April 2, 2025, is pivotal because it's the focal point for Trump's aggressive trade agenda, promising either a major policy shift or a negotiated pivot, with ripple effects on prices, jobs, and international relations--all while testing the limits of executive power and global patience.
What is the OECD?
The OECD, or Organization for Economic Co-operation and Development, is an international organization founded in 1961 to promote economic growth, trade, and improved living standards among its member countries and beyond. Headquartered in Paris, France, it succeeded the Organization for European Economic Co-operation (OEEC), which was established in 1948 to administer the Marshall Plan for post-World War II European reconstruction. The OECD's mission has since evolved to foster policy coordination, data sharing, and best practices on economic, social, and environmental issues.
As of yesterday, the OECD comprises 38 member countries, primarily high-income economies like the United States, Japan, Germany, Canada, and Australia, though it also includes emerging players like Mexico, Chile, and Turkey. Membership reflects a commitment to democracy and market-based economies, and is funded by member contributions, with the U.S. as the largest contributor (around 20% of the budget).
The OECD is known for its extensive research and policy analysis. It publishes influential reports like the "Economic Outlook", which recently warned of growth slowdowns due to U.S. tariffs, and maintains databases on everything from GDP to education metrics. It also sets global standards, such as the BEPS (Base Erosion and Profit Shifting) framework to combat tax avoidance by multinational corporations.
In practice, the OECD acts as a forum for governments to compare data, refine policies, and tackle shared challenges. For instance, its December 2024 forecast highlighted a potential 0.5% hit to U.S. GDP by 2026 from tariff escalation, underscoring its role in shaping trade debates. While it lacks binding enforcement power, its recommendations carry weight due to its rigorous, evidence-based approach and the economic clout of its members, who collectively account for about 60% of global GDP.
What would a 0.5% hit to U.S. GDP equate to for the S&P 500?
Estimating the exact impact of a 0.5% hit to U.S. GDP on the stock market is complex and depends on multiple factors, including the context of the GDP decline, investor sentiment, monetary policy responses, and broader economic conditions. However, I can provide a reasoned framework based on historical relationships and current economic data as of yesterday, to approximate the potential effect.
GDP and Stock Market Relationship
The stock market, often proxied by the S&P 500, doesn't move in lockstep with GDP but is influenced by it indirectly through corporate earnings, consumer spending, and investor expectations. A 0.5% reduction in GDP growth--say, from an expected 2.5% to 2.0% for 2025--represents a slowdown, not necessarily a contraction, since U.S. GDP is still projected to grow. Historically, stock market reactions to GDP changes hinge on whether the shift signals a recession (two consecutive quarters of negative growth) or merely slower growth.
Corporate Earnings Link: S&P 500 earnings are closely tied to economic growth. A rule of thumb from financial analysis suggests that a 1% change in GDP growth can lead to a 1.5%-2% change in corporate earnings growth, depending on sector exposure and profit margins. For a 0.5% GDP hit, this could translate to a 0.75%-1% reduction in S&P 500 earnings growth. In 2025, consensus estimates peg S&P 500 earnings growth at around 9% (down from 14% in 2024). A 0.5% GDP drop might trim this to 8%-8.25%.
Valuation Multiples: Stock prices reflect earnings multiplied by the price-to-earnings (P/E) ratio. The S&P 500's forward P/E is currently around 21-22, elevated compared to its 20-year average of 15-17, reflecting optimism about growth and policy (e.g., Trump-era tax cuts). A GDP slowdown could pressure this multiple if investors grow cautious, though a 0.5% hit alone is unlikely to trigger a major re-rating unless paired with recession fears.
Historical Precedents: During non-recessionary slowdowns, stock market reactions are muted. For example, in 2019, when GDP growth softened from 2.9% to 2.3% (a 0.6% drop), the S&P 500 rose 29%, buoyed by Fed rate cuts and trade optimism. Conversely, sharper GDP revisions tied to policy shocks--like the 2018 tariff escalation--saw temporary dips (e.g., a 10% S&P 500 correction in Q4 2018). A 0.5% hit, as flagged by the OECD due to 2025 tariffs, is modest but could still spark volatility.
Quantifying the Impact
Let's assume the 0.5% GDP hit stems from Trump's April 2, 2025, tariff plan, as the OECD suggested in December 2024. Current S&P 500 levels are around 5,776 (per recent closes), implying a market cap of roughly $48T (based on S&P 500 total market cap estimates).
Earnings Impact: A 0.75%-1% drop in earnings growth shaves $10-$13B off annual S&P 500 earnings (assuming $1.3T total earnings for 2025). At a constant forward P/E of 21-22, this equates to a 0.75%-1% decline in stock prices, or a 43-58 point drop in the S&P 500.
Sentiment and Multiples: If the GDP hit raises tariff or inflation fears (e.g., OECD's 2.8% inflation forecast for 2025), the P/E could contract slightly--say, from 22 to 21. This 4.5% reduction, combined with the earnings hit, could amplify the decline to 5%-6%, or 288-346 points. However, a 0.5% GDP drop alone is unlikely to justify such a steep P/E shift absent broader panic.
Volatility Spike: The VIX (volatility index) often jumps 20%-30% on GDP-related uncertainty (e.g., from 15 to 18-20). This wouldn't directly lower the S&P 500 but could exaggerate daily swings, amplifying the downside if selling accelerates.
Realistic Range
For a 0.5% GDP hit in isolation--without a recession or major policy overreach--the S&P 500 might decline by 1%-3%, or 58-173 points. This aligns with our analysis of a potential 2.5% earnings hit from tariffs, adjusted for a smaller GDP effect. If offset by Fed rate cuts (projected at 3.25%-3.5% by year-end) or tariff moderation, the drop could be closer to 1%. Conversely, if retaliation or consumer spending falters (e.g., the 11% decline from December to March), it might lean toward 3%.
In summary, a 0.5% hit to U.S. GDP in 2025 would likely translate to a 1%-3% S&P 500 decline, assuming no major escalation beyond current tariff expectations. The precise impact hinges on whether markets see this as a blip or a focused trend-watch on consumer confidence (92.9 in March) and Fed signals for other clues.
In 2018, when did the stock market move lower on tariff concerns?
In 2018, the U.S. stock market experienced several notable declines driven by tariff concerns, particularly as the Trump administration escalated its trade war with China and other trading partners. Below is a timeline of key moments when the stock market moved lower due to tariff-related developments, focusing on the S&P 500 as a benchmark:
Early 2018: Initial Tariff Announcements
March 1-2, 2018: Trump announced plans for a 25% tariff on steel and a 10% tariff on aluminum imports, targeting countries like Canada, Mexico, and China. The S&P 500 dropped 1.3% (36 points) on March 1 to 2,677, reflecting fears of global retaliation. Over the next week, it fell another 1.1% as markets digested the news, though losses were tempered by hopes of exemptions.
March 22-23, 2018: The U.S. imposed $50B in tariffs on Chinese goods under Section 301, citing intellectual property theft. China retaliated with $3B in tariffs on U.S. exports. The S&P 500 fell 2.1% (55 points) on March 22 to 2,588, followed by a 2.2% drop (59 points) on March 23 to 2,529--the lowest close since February--erasing much of the year's gains. The Dow saw a 424-point plunge on March 22 alone.
Mid-2018: Escalation and Volatility
June 15-18, 2018: Trump announced a 25% tariff on $50B of Chinese imports, effective July 6, with threats of more if China retaliated. China responded with matching tariffs on U.S. goods like soybeans. The S&P 500 fell 0.5% (11 points) on June 15 to 2,771, and over the next few days slid another 0.5% as trade tensions mounted, closing at 2,758 by June 18. This marked the start of a choppy summer.
July 6, 2018: First tariffs took effect, and the S&P 500 dipped 0.4% (10 points) to 2,759, with intraday swings reflecting uncertainty. Markets briefly stabilized as some saw tariffs as negotiation tactics, but unease persisted.
Late 2018: Trade War Intensifies
September 17-18, 2018: Trump announced a 10% tariff on $200B in Chinese goods, effective September 24, set to rise to 25% by year-end. The S&P 500 fell 0.4% (10 points) on September 17 to 2,888, and another 0.7% (20 points) to 2,868 on September 18 as China vowed $60B in counter-tariffs. This stoked fears of a broader economic slowdown that never ended up happening.
October 10-11, 2018: Amid ongoing trade friction and rising bond yields (10-year Treasury hit 3.23%), the market saw a broader sell-off. The S&P 500 dropped 3.3% (94 points) on October 10 to 2,785, and 1.7% (48 points) on October 11 to 2,737--partly tariff-driven, though compounded by tech sector weakness and Fed rate hike fears. This marked a 10% correction from its September peak (2,930).
December 4-6, 2018: Uncertainty flared after mixed signals from a Trump-Xi meeting at the G20. Initial optimism faded as arrests (e.g., Huawei's CFO) and tariff threats resurfaced. The S&P 500 fell 3.1% (90 points) on December 4 to 2,700, and over two days lost 4.6% (127 points) to 2,636--hitting a yearly low as trade war fears merged with recession worries.
Context and Scale
The S&P 500 started 2018 at 2,673, peaked at 2,930 on September 21, and closed at 2,506 on December 31--for a 6% annual decline. Tariff concerns were a key driver, especially in Q4, when the index fell 14% from its high, entering a technical correction. The Dow Jones Industrial Average saw similar volatility, dropping 5.6% (1,409 points) in December alone. While other factors--like Fed tightening and tech overvaluation--played roles, trade war headlines consistently triggered sell-offs, with the VIX spiking to 36.1 in December from a yearly low of 9.8.
Key Takeaways
The most significant tariff-driven declines in 2018 occurred on March 22-23, June 15-18, September 17-18, October 10-11, and December 4-6, with drops ranging from 2%-4.6% over one- or two-day periods. These moves reflect how markets priced in higher costs, disrupted supply chains, and potential growth hits--patterns that could echo in 2025's tariff landscape.
From the beginning of 2018 to the end of 2018, the S&P 500 declined roughly 6%, which, if history repeats anything close to that this year, does suggest no apparent reason for long-term investors to be concerned.
The good news is, that by the end of 2019, the total return for the S&P 500 was approximately 30% for the year. It was one of the best-performing years for the index in the past decade. And then we all know what happened with COVID.
Is the S&P 500 guaranteed to perfectly mirror what happened in 2018, and 2019? Absolutely not. This is a different market environment than the one we had just seven years ago, but it is very possible that this year and next could end up eerily similar.
Still, without knowing exactly how things are going to shake out next month, we'll just have to roll with whatever ends up happening, and, more importantly, look to take advantage of what looks good at the time.
Furthermore, corrections of 10%-15% are perfectly normal in any market environment, especially since the S&P 500 achieved a total return of 26% in 2023, and another very attractive 25% in 2024. In other words, when it comes to investing in stocks, we must always take the bad with the good.
The S&P 500, from peak to trough this year, already corrected 10%--with February 19th being the peak and March 13th being the trough. Considering the forward price-to-earnings (P/E) ratio of the S&P 500 at the beginning of 2018 was approximately 18.5, we attribute the markets' recent selloff to more of a valuation reset than tariffs. If that does persist, however, a forward P/E of 18.5 on the S&P 500 would put the benchmark index down around the 5K level.
How will China, Canada, and Mexico end up faring throughout this entire process? I think we're all going to be just fine. As a matter of fact, we're not seeing any significant signs of major looming market breakdowns in China, Canada, or Mexico.
Therefore, while the days, weeks, and months ahead can end up being any kind, we will look to use any potentially lower levels on the major indexes to identify those individual names and ETFs we believe will provide both traders and investors with exceptional returns when it's all said and done.
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John Monroe - Senior Editor and Analyst
