S&P 500 Caught Offside By Tariffs
Tariffs Drive S&P 500
The S&P 500 was very volatile last week. The emergence of the DeepSeek narrative resulted, as predicted, in a correction to the downside at the start of the week.
More of a concern, however, was the S&P 500 response to the announcements regarding tariffs on Friday.
The S&P 500 rallied on Friday on the back of PCE data and accelerated on reports that tariffs would be delayed.
Tariff Announcement
That optimism was crushed when the Trump administration corrected the narrative and clarified that the planned tariffs on Mexico and Canada would go ahead on 1 February. In response, the S&P 500 corrected 1.5% to the downside.
Note: We believe both narratives regarding tariffs were accurate. Economic tariffs will be applied, and for procedural reasons (Section 301, etc.), the earliest they will be used is likely March.
As outlined at the time of the State Of Emergency executive orders, the initial tariffs on Mexico, China and Canada are being applied for border security reasons. They are negotiation tariffs. That said, they will likely morph into economic tariffs.
Trump’s Economic Plan And The S&P 500
Investors in the S&P 500 need to take time to understand Trump’s economic plan.
The trajectory for tariffs is clear. Higher tariffs will be imposed in an attempt to reshape the global trade order. The aim is for the U.S. to increase its production of manufactured goods. This is driven in part by job creation and, in part, by national security.
There are commentators who believe that the tariff narrative is bluster, that tariffs are merely a threat to influence trade negotiations, and that Trump wouldn’t apply tariffs as that would have a negative impact on the stock markets.
Our view is that Trump has signalled for decades that he doesn’t believe the global trade order works for the U.S. and is determined to correct the imbalance.
In addition, he sees tariffs as a revenue driver—revenue that he needs to address the federal deficit and fund future tax cuts.
U.S. annual imports currently total $3 trillion, and the U.S. collects a trade-weighted average of 2.2% in tariffs. Trump believes there is room to manoeuvre to the upside.
Overall, expect economic growth to slow in 2025 and a negative impact on earnings for stocks in the S&P 500.
S&P 500 Key Levels
The S&P 500 opens today in positive gamma. The gamma flip zone is 5965, call resistance remains 6100, and put support is 5860.
Investor sentiment and understanding of the tariff situation will determine the direction of the S&P 500 today. For the week, the Nonfarm Payroll report on Friday will also play a part. Expect a correction to the downside.
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