Tariffs Enacted

1. New Developments for Markets to Digest. There have been a few twists and turns regarding the tariffs that were announced on Friday. Initially, the new administration announced that tariffs on Canada, Mexico, and China would begin on February 4^th with 25% tariffs on Mexican and Canadian imports and an increase of 10% on already existing Chinese imports. But earlier today, Mexican tariffs were pushed out a month as the two administrations ironed out more specific details, while Canada and China tariffs remain in place.[1] To note, Canadian energy is one of the few exceptions, with a tariff rate of 10% instead of 25%. The Trump Administration remains focused on tackling the trafficking of drugs like fentanyl coming over the border from Mexico and Canada, and China as well. Mexico tariffs will be postponed because Mexico’s president Claudia Sheinbaum has agreed to send 10,000 soldiers to the U.S./Mexico border to prevent trafficking of fentanyl, drugs, and migrants into the U.S.

There are many moving parts to this situation, and quite frankly, many questions that are simply unknown – both economic implications (higher inflation) and markets and investments. That said, overall, we remain long-term investors and are looking for opportunities. It is expected that should all the tariffs go into effect, S&P 500 earnings would be hit by 7%. Some industries will get hit more than others, so it is not surprising that the “defensive” sectors are doing better than expected being consumer staples, healthcare, and energy. We have been adding to healthcare recently but continue to like consumer discretionary, industrials and financials. In other words, diversification remains paramount. 

It can be expected that prices for goods from these countries will rise, but to what degree and for how long is unknown. Estimates show the current tariffs will raise ~$150 billion of annual tariff revenue, equivalent to a 10-11 percent increase in the corporate tax rate. Compared to Trump’s 2018-2019 tariff increases on China, this new batch of tariffs on the three countries are 4-5 times larger on an absolute basis. As it relates to the U.S., the Peterson Institute for International Economics projects that the tariffs on Canada and Mexico will lower U.S. GDP by $200 billion across the next four years, with the tariffs on China declining U.S. GDP by $55 billion over the next four years and increase inflation by 20 basis points.

In the event of a trade war, the U.S. has the upper hand against its neighboring countries. 77% of Canada’s total exports go to the U.S. ($418 billion in 2023), and 83% of Mexico’s exports go to the U.S. ($475 billion in 2023). Meanwhile, the U.S. is much less dependent on goods from Canada and Mexico. Looking at November 2024, the U.S. imported $281 billion worth of goods, with $42 billion coming from Mexico and $34 billion from Canada, 15% and 12% respectively. Mexican imports mostly consist of machinery, appliances, electrical equipment, and vehicles, while Canadian imports consist of mineral products.^[2]

Overall, tariffs on Mexico, Canada, and China account for approximately $1.3 trillion worth of imports, nearly 43% of all U.S. imports and 5% of U.S. GDP. As far as the tariffs affect S&P 500 earnings, about 7% of the index’s revenue is derived from these three countries. It is possible that the tariffs are short lived, but in the meantime, we focus on company fundamentals. Headlines will be volatile in the coming weeks, and it is important to not make short-term impulses on what may be short-term reactions, as seen today.

Chart 1: Visualizing U.S. Imports in November 2024^[3]

Chart 2: Top U.S. Imports from Mexico and Canada in November 2024^[4]

2. Fixed Income. U.S. Treasuries rallied last week following the release of Deepseek’s AI model spooking investor sentiment, and Trump tariff concerns. Despite the Fed deciding to hold rates steady, the 2-, 10-, & 30-year yields fell by 7, 8, & 6 bps respectively.

Credit spreads widened across investment grade and high yield last week increasing 1 bp to +117 bps for investment grade and 7 bps to +303 bps for high yield. For the third week in a row, credit ratings deteriorated as the main rating agencies issued 33 downgrades and 28 upgrades. Within those changes, financials led with the most downgrades, while energy had the most upgrades. Investment Grade issuance in January totaled $191 billion; roughly 25% more than the average January issuance of $151 billion over the last four years.

Tax-exempt yields followed treasuries albeit a slower pace, with yields falling 2-4 bps across the curve. January’s tax-exempt new issue volume totaled $37 billion, which was up 17% from last January.

3. The Week Ahead.

Earnings – Monday: CLX, IDXX, PLTR, TSN. Tuesday: ADM, AMCR, AMD, AME, AMGN, APO, BALL, CMG, CMI, CNC, DOC, EA, EG, EL, ENPH, EQR, FICO, FMC, FOX, GOOGL, HUBB, IT, J, KKR, MDLZ, MPC, MRK, NXPI, OMC, PEP, PFE, PNR, PYPL, REGN, SPG, TDG, WEC, WTW, XYL; Wednesday: ALGN, ATO, BG, BSX, CDW, COR, CPAY, CTSH, DAY, DIS, EMR, ESS, F, FI, HOLX, IEX, ITW, JCI, JKHY, MCK, MTCH, NWSA, ODFL, PRU, QCOM, SWK, TECH, TROW, UBER, VTLO; Thursday: AFL, ALL, AMZN, ADP, APTV, AVB, BDX, BMY, BWA, CMS, COP, CTVA, EFX, EXPE, FTNT, GL, HII, HLT, HON, HSY, ICE, IQV, KVUE, LH, LIN, LLY, MAA, MCHP, MET, MKTX, MOH, MPWR, ORLY, PM, RL, SNA, STE, TPR, TTWO, UDR, VRSN, XEL, YUM, ZBH; Friday: CBOE, CPT, FTV, KIM, MHK, MTD, PFG, REG.

Economics – Monday: ISM Manufacturing; Tuesday: Durable Orders, Factory Orders, JOLTS Job Openings; Wednesday: ADP Employment Survey, Markit PMI Services, ISM Service; Thursday: Initial Claims, Unit Labor Costs, Continuing Jobless Claims; Friday: Hourly Earnings, Manufacturing Payrolls, Nonfarm Payrolls, Unemployment Rate, Michigan Sentiment.

Stephanie Link’s TV Schedule:

Return for Selected Indices^[5]

Sources:

^[1] Source: CNBC. As of January 31, 2025.

^[2] Source: Bloomberg. As of February 3, 2025.

^[3] Source: Bloomberg. As of February 2, 2025.

^[4] Source: Bloomberg. As of February 2, 2025.

^[5] Source: Bloomberg. As of February 03, 2025.

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