Higher tariffs for longer | PERSPECTIVES Special February 2025

Introduction

We are only in the fourth week of Donald Trump's second U.S. presidency and markets have already been confronted with a wide range of import tariff announcements from the self- proclaimed "Tariff Man". These have triggered heterogeneous reactions across asset classes and added to uncertainty about future U.S. moves and possible retaliation from targeted trading partners. Given the erratic nature of Trump's announcements, leading to a high degree of speculation about his likely future actions, and the variety of possible endgames, markets have been volatile and are likely to remain so for the time being. After all, the trade war episode (2017-2019) of Trump's first presidency taught us that trade wars are not fought in a single battle, but with multiple rounds and a constant back-and-forth. As such, we believe that a dispassionate analysis of the aims of Trump's tariff policy is warranted to separate the noise surrounding the announcements from what may be more enduring elements laying the groundwork for investor guidance – with a focus on European and U.S. equities as a starting point.

• "Trade war 2.0" is on. We argue against the idea that the U.S. administration is simply using tariffs as a bargaining chip, setting out the reasons why higher tariffs will be implemented and remain in place for longer.
• Focus on the run-up to April 1, when the Congressional Budget Office (CBO) update of fiscal outlook and policy actions under Trump’s "America First Trade Policy" are due, setting the framework for U.S. policymakers’ decisions on both fiscal and trade policies in the coming years.
• Tariffs have only a limited effect on the aggregate earnings of S&P 500 and STOXX 600. However, risk premiums will ebb and flow with a varying intensity of tariff news and actions, inducing stock price volatility.
• Certain sectors, and individual stocks, are more exposed to direct tariff effects. Automobiles and Basic Resources stand out. Health care and industrial imports to the U.S. may also be targeted by tariffs, but listed companies should cope well with the effects.