Why the Trade War Won’t Crush U.S. Corporate Profits

Rate this post
Why the Trade War Won’t Crush U.S. Corporate Profits

Trade tensions between the United States and China will worsen, with new tariff hikes from both sides slated to go into force on June 1, causing significant alarm on Wall Street. However, according to a recent Goldman Sachs research, the impact on US company earnings would be minor. While US firms are exposed to China, Goldman argues the exposure is insufficient to cause a significant impact in profitability. Firms will be able to mitigate the negative consequences of tariffs by raising consumer prices somewhat and modifying their supply networks.

Why the Trade War Won’t Kill Corporate Profits

(2 Scenarios)

1. 25% tariff on $200 billion of imports from China

– A 2% rise in earnings per share may be countered by a price increase of less than 1%.

2. 25% tariff on all imports from China

– 6% EPS revision, can offset with a 1% price increase

Source: Goldman Sachs

What It Means for Investors

The same trade deficit between the United States and China that the Trump administration hopes to correct shows U.S. corporations’ vulnerability to China. With exports to China being smaller than imports, the majority of the harm will be caused by increased import costs rather than lost sales.

In terms of sales, S&P 500 corporations derive the vast majority (70%) from inside the United States, with just 2% coming directly from Greater China. To be sure, according to Goldman Sachs, China accounts for 18% of total United States imports. However, Goldman believes that businesses may take efforts to reduce the damage.

  Snap (SNAP) Option Traders Bearish Despite Earnings Beat

While a 25% tax on all Chinese imports may reduce current consensus forecasts of S&P 500 earnings per share (EPS) by up to 6%, this extreme scenario is improbable. The bank’s more mild forecast mirrors the actual reality: 25% tariffs on $200 billion in Chinese goods. In this situation, consensus earnings per share projections might be reduced by 2%.

In both cases, US firms would be able to counteract the negative consequences of tariffs by raising prices and replacing Chinese suppliers with others. According to Goldman Sachs, a 1% rise in pricing would be sufficient to offset a 2% fall in the average EPS projection. Furthermore, a 1% price rise would more than offset Goldman’s worst-case scenario.

Looking Ahead

Nancy Lazar, seasoned economic analyst and CEO of Cornerstone Macro, is positive about the prospects of the US economy amid growing trade tensions, similar to Goldman Sachs’ optimism about US corporate earnings. “Trade wars are awful,” she told Barron’s. “However, in the long run, there’s a strong argument that investment is returning to the United States owing to increased costs in China, along with our lower corporate tax rate.”

You are looking for information, articles, knowledge about the topic Why the Trade War Won’t Crush U.S. Corporate Profits on internet, you do not find the information you need! Here are the best content compiled and compiled by the achindutemple.org team, along with other related topics such as: Business.

Similar Posts