Still immersed in the frenzy of the US stock market? Economists are sounding the alarm: a tariff storm is quietly brewing

According to Zhitong Finance APP, the U.S. stock market has continued to rise since the election, and the market clearly welcomes Trump's victory. However, if the incoming U.S. president follows through on his tariff threats, turmoil may follow.

The policies of the new government remain largely uncertain, including Trump's renewed threats last month to impose tariffs on China, Canada, Mexico, and other U.S. trading partners. The timing and scope of the new tariffs are also unclear, and the severity of the tariffs' impact on the U.S. may depend on whether the targeted countries take their own measures.

However, economists' worst-case scenario predictions paint a worrying picture.

An extreme long-term scenario predicted by Oxford Economics shows that global trade could shrink by as much as 10%, and U.S. economic growth could be about 1% lower than current expectations. Other forecasts indicate that tariffs will hit corporate profits, especially in the retail, industrial, and materials sectors, while also pushing up inflation.

David Kelly, Chief Global Strategist at JPMorgan Asset Management, stated, "Tariffs are essentially detrimental to economic development. In fact, this could create a stagflation effect, increasing inflationary pressures while slowing economic growth."

Trump's new threats have triggered volatility in the foreign exchange market, but U.S. stocks have not been significantly affected. As the market continues its rise of over 26% this year, the S&P 500 index has repeatedly set new historical highs.

Barclays strategists estimate that proposed tariffs on Canada, Mexico, and China, along with any retaliatory actions, could drag down S&P 500 index earnings by 2.8%.

Barclays Bank noted that the materials and non-essential consumer goods sectors could face double-digit profit declines due to their significant supply and production operations in Mexico and Canada.

Retaliatory tariffs from targeted countries will also exacerbate the impact on profits.

Bank of America Global Research estimates that if tariffs on China double to 40%, and tariffs on other regions of the world (excluding Mexico and Canada) rise to around 8%, S&P 500 index earnings would be hit by 1%. However, the bank's strategists wrote that due to retaliatory tariffs harming overseas sales, the impact on profits would rise to 5%.

Deutsche Bank economists indicated that tariffs could also raise the core Personal Consumption Expenditures (PCE) price index from 2.3% next year to around 2.5%.

Trump's campaign team did not immediately respond to requests for comment.

Trump 1.0

Trump has called tariffs "the most beautiful word in the dictionary" and argued that his plan will rebuild America's manufacturing base, increase U.S. jobs and income, and generate trillions of dollars in revenue for the federal government over the next decade.

Some investors are reviewing Trump's tariff policies from his first term to understand the potential impact this time around.

Data from RBC Capital Markets shows that during the U.S.-China trade war in 2018, the materials and industrial sectors were the worst-performing industries, declining by more than 5% over a nine-month period.

The bank noted that defensive stocks, which are popular during uncertain times, had the highest returns, with utilities and real estate both rising by more than 10% RBC's strategists downgraded the materials sector rating from "overweight" to "market perform" earlier this month, citing its poor performance during 2018 as a factor. Since Trump's election victory on November 5, the sector has declined by 3%, while the S&P 500 index has risen by 4% during the same period.

An analysis by Citibank shows that on days when the U.S. announced tariffs or China took retaliatory measures in 2018 and 2019, the technology sector often performed poorly, particularly in hardware and semiconductors.

Citibank strategists stated in a recent report: "However, given that they are still at the forefront of the AI story, if tariffs are announced, they may benefit from prior orders, so we are not overly concerned about the immediate risks."

David Lefkowitz, head of U.S. equities at UBS Global Wealth Management, indicated that higher tariffs on China could make retailers, industrial companies, and tech hardware firms the targets. Lefkowitz noted that well-known American brands like Apple (AAPL.US), Starbucks (SBUX.US), and Nike (NKE.US) could face retaliatory measures.

Lefkowitz mentioned that Canadian and Mexican automakers might feel the pressure from any tariffs. Following Trump's tariff commitments last month, General Motors (GM.US) and other auto stocks faced sell-offs.

However, bullish investors point out that various components of Trump's economic agenda, including tax cuts and deregulation, could offset the impact of tariffs. Trump's choice of prominent investor Scott Bessent as U.S. Treasury Secretary, which is effectively the highest economic official in the U.S., has also been welcomed by Wall Street.

Lefkowitz stated that historically, Trump has measured his success at least in part by the strength of the stock market. He noted that this might make him cautious about implementing tariffs to avoid severely damaging the stock market.

"They are trying to promote economic growth in the U.S.," Lefkowitz said, "Tariffs will ultimately be gradually reduced, and Trump tends to focus on market performance. Therefore, so far, the market has been downplaying the rhetoric we hear on tariffs."