Quick Bite: Liberation Day
Author: Paul Zwi
President Trump’s Liberation Day seems to be turning into Market Turmoil Day. At the 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 by 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 aluminum.
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 earnings per share (EPS) and currently trades at a multiple of 20x. With little change to consensus EPS estimates so far, all 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 price-to-earnings (P/E) multiple more closely resembling the 10-year 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 Sachs’ earnings forecast (+3%) and apply the 10-year average multiple, as noted above, then you would recognise that the market is vulnerable to an 18% correction.
Source: Goldman Sachs
The likelihood of a mild or shallow recession in the US has certainly increased, with odds now estimated at around 1 in 3. Historically, US markets tend to experience significant losses during recessions. Based on past trends, the equity market typically sees a 25% drawdown in the S&P 500 from its most recent peak. If this pattern holds, it suggests a further 17% decline from current levels. In the last three major downturns of the S&P 500, the P/E multiple bottomed at 15x in 2022, 13x in 2020, and 14x in 2018.
The S&P 500 multiple is at the bottom of its trading range but well above recent bear market lows. The average P/E 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
