Over the past several months, some of the weakest sectors of the U.S. stock market have been those considered the most exposed to escalating tensions between the United States and its major trading partners.
Thus far this year, the materials sector
has lost 1.1% while the industrials category
is unchanged; both have severely underperformed the S&P 500
, which is up 7% over the same period.
These losses have come amid a volley of protectionist policies from multiple countries. President Donald Trump has announced, threatened, or imposed tariffs on billions of dollars worth of products, including automobiles from the European Union and a variety of steel and aluminum products from the EU, China, and other countries. Many of these tariffs have been met with retaliatory measures. In the most recent, China on Wednesday announced new tariffs covering $16 billion worth of goods.
More detail: Trade-war tracker: Here are the new levies, imposed and threatened
The imposed tariffs are already seen as having a negative impact on corporate profits, and extended uncertainty or any further escalation could amplify the negative impact on supply chains, corporate profits and share prices.
Such trends would likely be felt broadly across the economy, but the pain would be concentrated in sectors that are either directly targeted by tariffs, have higher raw material costs, or that have higher revenue exposure to overseas countries. According to UBS, such sectors may include machinery stocks, steel companies and semiconductor firms. It named 34 stocks it ranks among the most impacted, including Deere & Co.
, Macy’s Inc.
, U.S. Steel Corp.
, Qualcomm Inc.
, Freeport-McMoRan Inc.
, Best Buy Co.
, among others.
The investment bank argued that if trade tensions were to escalate — which it defined as $200 billion of additional China import tariffs being implemented — that would result in a 6% hit to S&P 500 earnings. For the most impacted companies, however, there would be a 10% to 40% erosion in profits as a result.
UBS collected 34 of the most impacted companies into a basket, and calculated that they have underperformed the S&P 500 by 7% since the start of the year. That underperformance is far less than the potential impact the companies could see on their profits in the event of an escalation.
“While the market appears to be pricing in some level of trade escalation, we believe that the relative impact on individual stocks is not being priced in, suggesting further downside on a relative basis,” the firm wrote in a note to clients.
If the trade issue were to simply escalate, UBS estimated that U.S. economic growth would be 1% lower, while global growth falls 42 basis points (0.42%). In the more severe possibility of a trade war, on the other hand, 245 basis points is expected to be cut from U.S. growth, while global growth would be expected to be 108 basis points lower.
S&P 500 earnings are expected to fall 14.6%, “however, industries and companies most impacted by tariffs, growth, commodities and China exposure could see earnings take a hit that is 2-plus times above that of the market overall.”
The investment bank suggested the pain wouldn’t be consistent even among the sectors with greater exposure to the issue, as “what is priced in varies across industries.” The issue is “more than priced in for automakers,” it wrote, though only somewhat accounted for in the share prices of machinery, chemical, and chipmaker stocks.
On the other end of the scale, UBS wrote that it was only minimally priced in for freight and transport companies.
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