Goldman says an all-out trade war would lower earnings for US companies by 15%


The acceleration of U.S. trade actions poses a risk to S&P 500 earnings through falling export revenues and rising input costs for American companies, according to Goldman Sachs.

The acceleration of U.S. trade actions poses a risk to S&P 500 earnings through falling export revenues and rising input costs for American companies, according to Goldman Sachs.

A 10 percent tariff on all imports from China would lower Goldman’s 2019 S&P 500 earnings per share estimate by 3 percent, Goldman Sachs chief U.S. equity strategist David Kostin wrote.

If "tensions spread" and a 10 percent tariff were imposed on all U.S. imports, Goldman said it would lower its 2019 EPS estimate by 15 percent to $145 a share.

“Tariffs benefit some domestic industries, but pose a risk to S&P 500 earnings through reduced revenues (lower exports) and weaker margins (higher input costs),” Kostin wrote. “Our economists now assign a 60 percent probability that the U.S. imposes tariffs on the recently targeted $200 billion of imports from China.”

President Donald Trump and his administration have defended an initiative of “fair and reciprocal” trade in recent months, demanding that some of the nation’s economic allies offer the U.S. a better deal in an effort to curb Washington’s trade deficit and promote American exports.

“When you’re almost 800 Billion Dollars a year down on Trade, you can’t lose a Trade War!” Trump tweeted in June. “The U.S. has been ripped off by other countries for years on Trade, time to get smart!”

The United States, which already imposed tariffs on $79 billion of goods and services and proposed an additional $702 billion on other foreign goods, is on track to levy taxes on 27 percent of all imports, the Goldman strategist said. The White House’s pivot toward more protectionist policies has sparked retaliatory measures from other countries, leaving many economists concerned that the tit-for-tat dispute could ultimately slow global economic growth.

Still, any negative impact of a worsening trade war would have an outsized impact on certain industries, Kostin added, underscoring U.S. oil and coal companies with large international supply chains.

“Industries heavily relying on imports theoretically face the greatest supply chain risk from rising trade tensions. Petroleum and coal products, transportation, and computer and electronic products have the highest share of imported cost of goods sold, while services companies should be relatively insulated.”

Certain tactics, such as investing in companies with higher domestic sales, would likely outperform if the trade dispute worsens, Kostin said.

The bank’s domestic sales basket has outperformed the S&P 500 by 130 basis points since May, easily besting its collection of stocks with high China sales exposure; that portfolio has lagged the market by 570 basis points since May 22.

Constituents of Goldman Sachs’ domestic sales basket include familiar names such as retailer Target , CVS Health and Wells Fargo ; none of the three companies has significant overseas sales. Other financial companies, such as Charles Schwab and U.S. Bancorp , tend to have reduced foreign exposure.

As another possible trade play, Goldman options strategist Rocky Fishman recommends overwriting equities with 12-month to 24-month SPX index call options. This strategy, using a December-2019-strike calls, will outperform if the index rises by less than 9 percent, the strategists explained.

"Our base case forecast is that S&P 500 rises 2 percent to 2850 at year-end 2018 and by 7 percent to 3000 at year-end 2019," Kostin wrote. "In the event of a severe global trade war, our 2019 earnings per share forecast could equal $145 and the forward P/E multiple could contract by 10 percent to 15 times, dragging S&P 500 to 2200 by year-end 2018."

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