The Market Beatings Will Continue, Until Morale Improves

April 4, 2025

Market’s are falling so let’s get to it.

I keep staring at this. This is the S&P 500. Estimated earnings above for 2025, and an earnings multiple on the left.

The Baseline EPS comes from Goldman Sach’s estimate for the S&P 500. Yellow box is where the S&P 500 was at before Trump’s “Liberation Day” whereby he announced reciprocal trade tariffs on imports.

Let’s just ignore the Consensus EPS column . . . it’ll be way off. Nowhere near accurate, not with tariffs at the rates they’re being set. Effective April 9th, the tariffs equate to about a 22% price increase on pretty much everything. Since we love our TEMU and Amazon stuff, call it 54% as that’s the rate imposed on Chinese goods.

Let’s also just say . . . this’ll crash the economy.

For sure if it sticks. Undoubtedly. Let’s say your business has a 15% profit margin. For every dollar you sell, you get to pocket 15 cents. Let’s also assume that your COGS (i.e., cost of goods sold, the very thing you buy and sell usually costs you 40% of every dollar). For Chinese sourced goods, your COGS just increased from 40 cents to 62 cents (54% import tax). 22 more cents! You only make 15 cents in profit, which really means profits = NEGATIVE 7 cents. Oh sure, pass it along to the consumer . . . yeah good luck doing that when consumers were already complaining about the price of eggs.

So corporate earnings? Small business earnings? If these tariffs stick, we’re FOR SURE 100% going into a recession. The market is currently assuming a 50% probability of a recession, which is why the stock market hasn’t fallen to the 4,500 level. Sure it’s shaved off 500 points already, or about 10% on the S&P 500, but if the tariffs stick, we should be looking at a 30-40% decline, easily.

The math doesn’t math.

Which is why maybe . . . just maybe . . . there is no spoon? Why the market thinks this could be the “Art of the Deal,” and eventually they’ll negotiate the tariffs lower. One where we’ll settle at ~10% broad based tariff rate. What about China? Yeah . . . MAGA . . . forget China. 54% for them and a pox on their house, or until we can negotiate a trade agreement. They’re running a $295B trade deficit with us, so tack on a 54% tariff and you’re looking at $150B (assuming that trade between the two countries don’t plummet), $450 more annually per person in the US. Don’t fret, it won’t be that . . . trade between the two countries will plummet for sure. Why? Because importing from every other similarly priced country with a 10%, or 0%, or anything lower than 54% tariff becomes cost competitive. Vietnam, which is proposing to drop its tariffs to zero on imported US goods, on balance suddenly becomes 54% cheaper as a place to source your goods.

Still, think about all of this. The US imports $3T of goods a year. Even a 10% tariff for everyone is about $300B of indirect taxes because that’s basically what this is. It’s an indirect tax that’s passed to the consumer. Like a VAT or GST, or anything other than a “direct” individual or corporate tax. Eventually the administration will extend those corporate and individual tax cuts, using these tariff to fund that direct tax cut, but the system shock happens now.

So go back to the example. We’ll just assume a 10% base rate becomes the new norm.

Forget the logistical, operational, and other legal/sourcing/human resource challenges to reorganizing your supply chain. Your little company makes a 15% profit, or 15 cents. Your costs just to buy the product to sell (before all your payroll, rent, marketing expenses) is 40 cents. You tack on a 10% tax on that cost, and it’s 4 cents to the government. Your 15 cents of profit just dropped by 4 cents. Oh it’s only 4 cents . . . you say, no it’s a 26% decline in profits. Your company makes 26% less if you can’t pass along those costs. Nike, Disney, Lululemon, Walmart makes 26% less, unless they can pass it along . . . which they can’t initially, but will eventually.

YOU WILL BEAR THE BURDEN OF THIS.

That’s fine for many people because this is what we voted for as a country. This is what we wanted (whether we knew it or not). Go back to the math though. If corporate profits are going to decline (immediately) with little short-term offsets by such amounts, is it any wonder the market’s selling off, and perhaps will more?

Now that’s just the simple math.

Combine it with just the pure “shock” of the tariffs, then add retaliatory shock, supply chain shock, and consumer sentiment shock. Add also the 401K shock of seeing your balances. The US economy runs on animal spirits, and when a tariff meteor slams into the ground, all the animals scatter. Spending will fall here as we all shelter in place. Leaving costs aside, REVENUES declines as people stop spending. Everything retrenches here even if the trade agreements come and come quickly.

This administration does have a put. They know it, we know it. You can’t slam the economy into a long-term recession, because those typically lasts a few quarters. Too much uncertainty means 2026 mid-term elections start to get dicey. Republican control of Congress starts to become questionable.

Yet, that’s a ways away. For now, on the back of a 26% return for the S&P 500 in 2023, and another 25% in 2024 on the back of MAG 7 stocks, the administration (i.e., Secretary Bessent) sees this as playing with house money. The market can absorb a decline if we’re able to re-architect the federal government (spending and revenue), reduce interest rates, weaken the dollar, and level the global trade playing field. Said another way the administration players will keep pressing, which means the market can lower. In fact, that may be “okay” as the long-term benefits outweigh the short-term costs.

So look at that chart again up top. Can we go lower? Will we go lower? The math tells you . . . if profits decline, maybe the value of the company that generates those profits (and its stock) should decline. More importantly, when the administration is saying the decline is actually “good for you,” then you know the beatings can continue . . . until morale improves.

As usual, thank you for your sacrifice.

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