Tariffs can be used to boost the size of the US manufacturing sector.
But tariffs, unfortunately, have two short-term negative effects on the economy:
Elevated uncertainty has a negative impact on household and corporate spending decisions.
Tariffs have a negative impact on corporate earnings as companies experience higher production costs.
Uncertainty may have declined modestly in recent weeks, but the next step is for tariffs to begin to have a negative impact on corporate earnings over the coming quarters. Combined with the risk of retaliation, this is negative for the S&P 500.
The bottom line is that the incoming data remains solid, but the soft data is deteriorating. With tariffs not going away, the observed weakness in the soft data should be expected to spill over to weakness in the hard data over the coming months. The next important data point is the March employment report, which will be released on Friday, April 4. The survey week for the employment report was the week of March 12, when tariff uncertainty was very elevated.
The performance of the S&P 500 will depend on the size of the adjustment costs as companies adjust to a new situation with permanently higher tariffs, see chart below.
Note: Using periods with 10% correction and categorizing them if they were followed by a recession. Sources: Bloomberg, Apollo Chief Economist
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