- After delays and negotiations, tariffs against China, Mexico, and Canada are finally here.
- Long-term tariffs could have serious implications for the US and global economies.
- Market experts share the top winners and losers from aggressive Trump tariffs.
Tariff threats have become a reality.
Last month, markets were thrown into turmoil by President Donald Trump’s tariff announcements, but investors relaxed as last-minute negotiations pushed off any immediate policy changes. Now, tariffs against Mexico, China, and Canada are officially on, and retaliatory tariffs have been announced. The start of the North American trade war this week was enough to sink the S&P 500 by more than 2% on Tuesday and wipe all of stocks’ postelection gains.
Expect “meaningful consequences” for the economy if a full-on trade war plays out, Morgan Stanley strategist Michael Zezas and his team wrote in a recent note.
They believe tariff policy isn’t set in stone, as Trump could negotiate another deal or remove tariffs quickly.
However, more market experts are coming around to the idea that tariffs could be long-lasting. The US economy is in for “short-term pain” as tariffs fundamentally change the structure of the US economy by growing the domestic manufacturing industry, Apollo’s Chief Economist Torsten Sløk said on a conference call on Tuesday.
Here are the areas of the market that’ll see the biggest impacts if Trump continues to double down on tariffs.
Tariff winners…
Tariffs aren’t all doom and gloom. After all, they’re meant to be protectionist policies that boost domestic industries.
For US equities, that means services are positioned to outperform consumer goods, Morgan Stanley’s Zezas said. Service companies’ business models can show resilience in the face of high tariffs. Services such as software, healthcare, and consulting don’t rely on imported goods and don’t face direct tariff repercussions.
Defensive stocks that provide essential goods and services will also outperform, as demand remains steady regardless of economic conditions.
“There’s no doubt that the Trump agenda is an America First agenda,” Paul Stanley, the chief investment officer of Granite Bay Wealth Management, told BI.
“We’ve been looking at more mid-cap stocks, which tend to be more domestic and industrial-focused. Industrials, financials, and healthcare tend to be very good US players as well,” Stanley added.
On the fixed-income side, Morgan Stanley identified US Treasurys as a solid bet in a high-tariff environment. In volatile times, investors will flock to safe government-backed assets. And as global trade tensions continue to rise, Zezas expects foreign investment to pour into US Treasurys as well.
Additionally, Zezas is bullish on longer-duration fixed income. A more dovish rate policy could be in the cards as tariffs drag on growth. If interest rates come down in the future, then bond prices will rise.
Bruce Kasman, JPMorgan’s chief economist and global head of economic research, also sees room for rates to fall amid high tariffs, even in a hot inflation environment.
“We believe the Fed will also display a heightened sensitivity to downside growth risks. While a faltering in labor demand is not in our forecast, the Fed will not hesitate to cut policy rates with elevated inflation if it sees a material threat to the expansion,” Kasman and his team wrote in a recent note.
…and losers
Long-term tariffs will undeniably drag on economic growth. Morgan Stanley predicts that headline personal consumption expenditures could increase by 0.3 to 0.6%, and real GDP could see a 0.7 to 1.1% decrease. Strategists are warning about the risks of stagflation, as inflation could remain high while growth slows.
It’s not just the US, either. Durable tariffs will increase inflation and slow GDP growth for Canada, Mexico, and China — with Mexico’s economy slipping into recession, Morgan Stanley predicts.
The stock-market sectors most at risk from severe tariffs include IT hardware and equipment, autos, and certain areas of consumer goods, according to the bank.
The auto industry will be hit especially hard as supply chains between the US, Canada, and Mexico are deeply integrated, Sløk said. Cars and car parts often cross country borders multiple times during production, so incurring a 25% tariff each time could seriously increase prices and suppress demand. This combination of increasing prices and lower consumer demand will only further encourage a stagflationary cycle.
In addition, raw materials are about to become more expensive, as a 25% tariff on steel and aluminum is scheduled to take effect later this month.
With the closing of the de minimis loophole, e-commerce companies with a strong overseas footprint are also facing disruption. Expect grocery prices to face upward pressure too, as the US relies heavily on Mexico for certain types of produce, Granite Bay’s Stanley said.
