Quick Bite – Liberation Day and US Market Valuations
President Trump’s Liberation Day seems to be turning into Market Turmoil Day. At time of writing this QB (US stock futures are sharply down, the ASX is down 100 points, and gold – the ultimate “safe haven” – has zoomed up to new record highs. What are we to make of it all?
As detailed by President Trump on Thursday morning, a different tariff rate will apply for each nation based on the barriers US exports face in that country.
Source: Yardeni Research
Different rates will apply to different countries. For China, the US’ reciprocal rate will be 34%; for India 26%; for Europe 20%; and for Australia and New Zealand, 10%. Subsequent comments by Treasury Secretary Bessent clarified that the 34% rate levied on Chinese imports to the US will be on top of the 20% already announced, so a combined 54% rate will be payable on goods imported to the US from China.
While these measures will affect Australian exporters directly and through our major trading partners, the greatest impact will be on the US. Already we have seen US consumer confidence fall sharply.
China, the rest of Asia and Europe will experience higher costs to trade and a hit to confidence, but in the absence of new US productive capacity, they will continue to supply the US as well as the rest of the world. China and other large economies in these regions also have capacity to stimulate to offset the hit from US tariffs.
The tariffs announced exceed most expectations, and therefore the reaction on markets is likely to be negative. But there’s always hope: perhaps Trump will be willing to negotiate reciprocal reductions in tariffs in due course. However, 25% permanent tariff rates will likely remain on autos, steel, and aluminium.
Where are valuations on US markets at present?
Higher tariffs, weaker economic growth, and greater inflation than previously expected are likely to lead to corporate earnings growth forecasts in the US being cut. At present, consensus forecasts are for growth of 9% over 2025. This now seems most unlikely. Perhaps a better estimate would be half of that. Goldman Sachs expects the S&P 500 to return -5% over the next 3 months and +6% over the next 12 months.
Source: Goldman Sachs
Furthermore, slowing growth and rising uncertainty warrant a higher “equity risk premium” and therefore lower valuation multiples for equities. The S&P 500 entered 2025 trading at a 21.5x P/E multiple on consensus forward EPS, and currently trades at a multiple of 20x. With little change to consensus EPS estimates so far, all of the 9% sell-off from the market peak in February has resulted from valuation contraction. We anticipate a further valuation decline in the near-term, with the P/E multiple more closely resembling the 10 average of 18x. If that were to occur (both the reduction in earnings and the lower multiple, then the US market is vulnerable to a correction of around 15-20%. Of course, we are not saying that will occur – no one really knows how events will unfold – but it is possible. If you follow Goldman Sach’s earnings forecast (+3%) and apply the 10 year average multiple (PE of 18x), then you would recognise that the market is vulnerable to an 18% correction.
Source: Goldman Sachs
The risks of a mild or shallow recession in the US will certainly have risen, and are probably now at odds of around 1 in 3. US markets usually take quite a hiding during recessions. The historical equity market recession pattern implies a roughly 25% S&P 500 drawdown from the recent market peak. If followed, this pattern would suggest a further 17% drawdown from recent prices. During the last three major S&P 500 downturns, the P/E multiple bottomed at 15x (2022), 13x (2020), and 14x (2018).
The S&P 500 multiple is at the bottom of its trading range but well above recent bear market lows. The average PE over the last 10 years was 18x. At time of writing, it is at 20x, and therefore still quite expensive. (For comparison purposes, the ASX 200 is presently trading at a 17x multiple.)
Source: Goldman Sachs
