Another Defining Moment for Markets

Additional support provided by Jeffrey Buchbinder, Chief Equity Strategist.

Defining Moments in History 

Anyone who remembers the joy of visiting airports in the pre-9/11 era knows how drastic security changes affect today’s flying experience. The Great Financial Crisis, another defining moment in history, was a catalyst for altering the customer experience throughout the mortgage application process. And more recently, the global pandemic changed commuting patterns. Perhaps it’s a bit premature and overly dramatic to say a remake of global trade would be a defining moment, but nonetheless, it’s worth having a playbook as investors prepare for the much-anticipated presidential press conference later today in the Rose Garden. The announcement comes at 4 p.m. ET. Regardless of how markets react to the news, any selling pressure in the near term is more likely to be an attractive buying opportunity, in our view, if investors get enough detail to clear some of the ambiguity and uncertainty from the past several weeks. 

The Tariff Playbook 

Today’s much-anticipated tariff announcements will presumably shift markets from max uncertainty to max tariffs before negotiations give countries an opportunity to bring country-specific tariff rates down. After starting tariff rates near 3% (of import values) before the levies Trump has already put in place, today’s announcement could potentially take average rates up to as high as 20%, if not higher. Based on comments from Treasury Secretary Scott Bessent and other Trump administration officials, countries will then have an opportunity to negotiate lower rates after the high rates go into effect, reportedly immediately.   

This is mostly guesswork at this point, but using a 20% tariff rate as a bear case could hit S&P 500 earnings 5–7%. (For perspective, the Smoot-Hawley Act of 1930, one of the causes of the Great Depression, took the U.S. average tariff rate to 20%.)  

A reasonable base case might be half that, or a 10% average incremental U.S. tariff rate and a 2–4% hit to corporate profits. We know from history that domestic importers often absorb some of the cost of a tariff, putting a damper on margins before passing some of the costs on to the consumer. 

Country effects will vary, but India, which has high trade barriers and is generally a strong economic ally of the U.S., will be very interesting to watch. In February, the U.S. and India discussed “Mission 500,” an initiative to double the trade relationship to $500 billion by 2030. For some countries, the President has been able to use trade policy as a negotiation tactic, despite the inherent risk involved. 

Canada and Mexico may have the greatest opportunities to negotiate lower rates via the USMCA and due to the significant auto exposure and generally less contentious relationships. It’s also easier to come up with “off ramps” related to border security. 

Europe is somewhere in the middle. Meaningful tariff increases on Europe are very likely to stick, and negotiations may be more difficult and tense. 

Tariffs on China are already very high and will likely go higher once sector tariffs are implemented (nothing on sectoral tariffs is expected to come out today). That could hit the chips sector, which is one of the reasons it’s been such a tough year for the technology sector, as well as drugmakers. A potential Trump-Xi Summit this summer may provide an opportunity to negotiate lower rates in China. Getting a TikTok deal done may also help. 

Inflation and the Fed 

Modeling inflation expectations include at least two key factors: corporate pricing power and consumer elasticities.  

Pricing power refers to the ability and interest of firms to pass along the burden of the tariff after net currency adjustments. We saw in previous years that some firms, like those in the textile sector, did not pass along the higher cost from tariffed inputs.  

Elasticities refer to the sensitivity consumers have to relative price changes. If the bear case occurs and tariffs have a material impact on spending behavior, inflation might stay above the Federal Reserve’s (Fed) target longer than expected. The most recent Personal Consumption Expenditures (PCE) inflation data was a bit of a disappointment, so the risk of a trade war is coming at a difficult time. Excluding food and energy, core inflation rose 0.37% month over month in February, the hottest monthly rate in over a year. 

Real personal spending rose 0.1% after a decline of 0.6% in January, pointing to a slowdown in economic activity despite sticky inflation. The savings rate rose to 4.6%, the highest since last summer, as consumers are increasingly cautious about the future. Headline annual inflation was unchanged at 2.5% but core inflation — which excludes food and energy — accelerated to 2.8% from 2.7%.  

Stagflation — a scenario with no or low growth and nagging inflation — could become more of a reality from trade wars and will create a headache for policymakers obligated to manage to the dual mandate of full employment and stable prices.  

Conclusion 

Today’s press conference at 4 p.m. ET could remove some of the uncertainty plaguing investors and help stocks rebound. We will closely analyze the new information and will update our views accordingly. For now, LPL’s Strategic and Tactical Asset Allocation Committee (STAAC) maintains its tactical neutral stance on equities, with a preference for the U.S. over emerging markets, growth over value, and large caps over small. The Committee does not rule out the possibility of additional short-term weakness, as the pace of growth is cooling, and trade policy and geopolitical uncertainty remain high. While the risk-reward trade-off for beaten-down stocks has improved at lower prices, a swift and sustainable recovery — even after today’s tariff announcements — seems unlikely under the cloud of trade uncertainty. LPL Research continues to monitor tariff news, economic data, earnings estimates, and various technical indicators to identify a potentially attractive entry point to add equities. 

Within fixed income, the STAAC holds a neutral weight in core bonds, with a slight preference for mortgage-backed securities (MBS) over investment-grade corporates. In our view, the risk-reward for core bond sectors (U.S. Treasury, agency mortgage-backed securities, investment-grade corporates) is more attractive than plus sectors. We believe adding duration isn't attractive at current levels, and the STAAC remains neutral relative to our benchmarks.