Donald Trump's proposal to impose tariffs on some of America's top trading partners doesn't bode well for the stock market.
If the President-elect follows through on his social-media-announced plan to slap 25% tariffs on Mexico and Canada, Wall Street analysts expect some specific stock sectors to suffer.
A separate Trump pledge to inflict an additional 10% tariff on Chinese products would add to the damage.
The three countries account for around 43% of goods imported into the US. Barclays estimates that protectionist policy disruptions to trade between the US and the targeted countries would drag down S&P earnings-per-share growth, a chief driver of this year's market gains. Tariffs would pull EPS down 1.7%, though this could go further if other countries retaliate — a full-blown trade war would slash EPS by 2.8%, the bank said.
In this scenario, Barclays expects the discretionary and materials sectors of the stock market to bear the brunt of the fallout. Given each sector's notable supply and production presence in Mexico and Canada, they are especially at risk of a double-digit negative EPS impact.
A more moderate impact would spread across other S&P 500 sectors, such as industrials, technology, and staples, according to the note.
To be sure, it remains to be seen whether the Trump administration follows through with the tariff plans, and Barclays says it sees the rhetoric as mainly a negotiating chip.
However, fresh research from the New York Federal Reserve indicates that tariff announcements alone could hamper the S&P 500, and many more are anticipated to come from the Trump administration. Looking back to the US trade war with China during Trump's first term, Fed researchers noted a persistent decline in S&P 500 returns after each tariff announcement.
"These stock-market price declines are likely to reflect two forces. First, markets may have become more pessimistic about future firm profits, and second, market participants may have become less willing to hold risky assets even if the expected path of future profits remained unchanged," Fed analysts wrote on Wednesday.
Goldman Sachs said trade uncertainty will remain in place whether or not the Trump administration enacts its tariffs against Canada and Mexico. In the bank's view, the protectionist stance is an opening bid ahead of negotiations in 2026 over the USMCA, a North American trade agreement reached during Trump's first term.
During his campaign, Trump has also floated ideas for across-the-board 10% tariff rate on all US trade. Before the election, Barclays estimated this would amount to a 3.2% drag on S&P EPS next year.