Stock Market Resilience Amidst Tariff Concerns

The stock market continues to trade near record highs despite the looming threat of tariffs. This resilience is puzzling, given that tariffs would negatively impact corporate earnings, the primary driver of stock prices.

Potential Consequences of Tariffs

Analysts predict that tariffs could reduce S&P 500 earnings per share (EPS) significantly. Goldman Sachs estimates a 2-3% reduction, while BofA anticipates an 8% hit.

The broader impact on earnings is complex, going beyond direct cost increases. JPMorgan warns that tariffs on Europe could further erode S&P 500 EPS by 2/3.

Offsetting Factors

Despite these concerns, the market may be betting on the following factors:

* Short-lived Tariffs: The tariffs may be implemented for a limited period or be less impactful than feared.
* Strong Earnings Growth: Q4 earnings have exceeded expectations, providing a cushion against potential tariff impacts.
* Earnings as the Primary Market Driver: Earnings are the most influential factor in stock prices, outweighing valuations.

Macroeconomic Crosscurrents

Beyond tariffs, the overall economic outlook remains positive:

* Job Growth Continues: The labor market added 143,000 jobs in January, with unemployment holding near 4%.
* Wage Growth Accelerates: Average hourly earnings rose 4.1% year-over-year in January.
* Labor Market Tightness: Employers continue to hire aggressively, with job openings exceeding the number of unemployed workers.
* Consumer Spending Holds Up: Card spending data indicates relatively strong consumer spending despite deteriorating consumer sentiment.
* Business Investment Remains High: Orders for core capital goods signaled continued economic strength in the months ahead.
* Services Growth: Surveys suggest a slowdown in the service sector but remain positive, with hiring on the rise.
* Manufacturing Optimism: Business confidence in the manufacturing sector has surged to its highest level in nearly three years.

Long-Term Outlook

The long-term outlook for the stock market remains favorable, supported by expectations of continued earnings growth. Positive demand and economic growth suggest that the market will continue to perform well over time.

However, investors should remain cautious of macroeconomic risks and the potential for short-term volatility. Market dynamics can change rapidly, and it is essential to manage risk and maintain a long-term perspective.