Market Unprepared for Potential Interest Rate Hike Amid Tariffs
Economic Indicators Point to Strong Growth
Despite positive indicators such as a 3% GDP growth rate, high stock prices, and robust investments in AI and defense, economists warn of potential risks. Torsten Sløk, chief economist at Apollo Global Management, highlights the inflationary impact of Trump's tariffs.
Tariffs Fuel Inflation Concerns
Monday's steel and aluminum tariffs, combined with existing and proposed tariffs on Chinese imports, have raised concerns about rising inflation. Deutsche Bank estimates aluminum and steel tariffs alone could inflate the PCE price index by 0.4%.
Goldman Sachs Analysis
Long-term tariffs on Canada and Mexico imports could elevate the PCE by 0.7% and reduce GDP by 0.4%, according to Goldman Sachs economists.
Market Underpricing Risk
Sløk emphasizes that the market has not factored in the likelihood of interest rate hikes. Goldman Sachs chief US strategist David Kostin predicts a 2-3% decline in S&P 500 earnings per share if tariffs are sustained.
Company Impact
Kostin suggests companies may absorb input cost increases, leading to squeezed margins, or pass on costs to customers, potentially reducing sales volumes.
Implications for Investors
Investors should be aware of the potential for continued rate hikes and adjust their profit estimates accordingly.