Key Points
- RBC Capital warns of a potential 5-10% stock market decline due to new U.S. tariffs on China, Mexico, and Canada.
- Corporate executives face challenges in managing earnings, margins, and business confidence.
- Tariffs could increase inflationary pressure, adding uncertainty to Federal Reserve policy.
- RBC maintains its S&P 500 year-end forecast 6,600 but acknowledges increased downside risk.
RBC Capital Markets has raised concerns about a potential stock market pullback as new U.S. tariffs on China, Mexico, and Canada take effect. The investment bank warns that the S&P 500 could experience a 5-10% decline due to these policy changes, particularly as equities have been trading at high valuations and investor positioning appears overextended.
According to RBC, market complacency had been a significant issue, with many macro forecasters previously dismissing the possibility of tariffs as merely a negotiating tactic. As a result, investors had largely ignored the risk, allowing the S&P 500 to remain near record highs. While European investors expressed concern about tariffs in recent meetings, U.S. investors were more divided—some shared similar worries, while others viewed the situation as too uncertain to predict.
RBC strategists, led by Lori Calvasina, believe these tariffs present a substantial challenge for corporate executives, potentially impacting earnings per share (EPS), profit margins, demand, and overall business confidence. “Post-election and recent company commentary also leave us convinced that the current iteration of tariffs presents a significant, new challenge for the C-suite to overcome,” the strategists stated in their report.
Another concern is inflationary pressure, as tariffs could increase businesses’ costs, leading them to pass those costs on to consumers. This could create further uncertainty regarding Federal Reserve policy, adding another headwind for the stock market.
Despite these risks, RBC is not yet adjusting its base case forecast for the S&P 500, which will be 6,600 by year-end. However, they acknowledge that the likelihood of revising this outlook downward has increased. The bank compares the current situation to 2018, when a trade war with China triggered a market decline of more than 20%, though it does not expect the current situation to be as severe.
The firm also points to mitigating factors. In recent years, U.S. companies have developed resilience in handling economic challenges, and the impact of the tariffs may fall more heavily on America’s trading partners. Additionally, RBC suggests the new tariffs could be short-lived, offering some hope for market stability.