Citi Strategist: Market Fundamentals Can Withstand Tariffs Despite Uncertainty

Market Reaction to Tariffs

• 💡 The market has been navigating tariff-related uncertainty since the beginning of the year, and has become increasingly comfortable that fundamentals can survive even with a tariff backdrop.
• 📈 Stocks are currently down and yields are up, a reaction that initially seemed counterintuitive given potential tariff relief.

Impact on S&P 500 Earnings

• 📊 A while back, it was argued that the tariff drag on S&P 500 earnings could be as much as 5%, but this has been mitigated by tax reform measures.
• ⚠️ The current twist involves the potential need to resin some tariffs, creating a catch-22: it could be an incremental positive for earnings, but tariffs have also offset deficit numbers.

Company-Specific Tariff Impacts

• 📉 Many companies have reported that they were able to mitigate tariff impacts more than feared, though not all impact was felt in the most recent quarter due to deadlines and delays.
• 🧩 Companies are experiencing tariff implementation on a company-by-company path, making aggregate conclusions difficult.
• 🛍️ Some retailers are finding they can pass on tariff costs to consumers in the form of higher prices, contrary to earlier expectations.

Future Uncertainty and Market Sensitivity

• 🎢 The ongoing tariff drama is expected to continue, reinvigorating uncertainty at a time when the market has had a good run and is trading at 25 times trailing earnings.
• 🧐 The market is likely to be very sensitive to incremental news flow that disrupts the positive sentiment that has driven recent market moves.