Analysis-Investors on guard as US tariff threats evolve

By Lewis Krauskopf and Davide Barbuscia

NEW YORK (Reuters) - Investors are seeking to protect portfolios from the potential economic fallout from President Donald Trump's tariff plans even as many on Wall Street doubt the situation will erupt into a sustained trade war that cripples assets.

Announcements on tariffs have whipsawed markets this week as investors try to wrap their heads around the evolving dispute. Sweeping tariffs Trump ordered on Saturday on Mexico and Canada were paused a month while tariffs were being imposed on China, which retaliated with levies of its own.

Some investors have been preparing for the potential for tariffs that Trump vowed to put in place during his campaign, including moving to assets seen as less vulnerable to a trade dispute or geopolitical uncertainty more broadly.

With stocks trading at lofty price-to-earnings ratios, investors also said the tariff news could warrant more caution for equities and create volatility in the near term.

At Nomura Capital Management, where stretched valuations for equities and other risk assets had already spurred the firm to become more defensive in recent months, the tariffs were further reason to be cautious, said Matt Rowe, head of portfolio management and cross-asset strategies.

With the tariff situation, "it's really hard to see exactly where it's going to go, how long it will last," Rowe said. "But it's easy to say that this is not good for growth, it's not good for consumer spending, and it's likely to have a negative impact on earnings."

The tariff developments caused big swings in equities and currencies on Monday, which retraced initial moves after news of the pauses on the Mexico and Canada tariffs.

"The threat of tariffs is live and that's unlikely to go away," said Michael Medeiros, macro strategist at Wellington Management, adding that the uncertainty could force the firm to explore more tactical, short-term trades.

PROFIT SQUEEZE

Analysts estimate that tariffs could drive up inflation while weighing on economic growth and corporate profits. Goldman Sachs strategists said Trump's tariffs announced on Saturday - 25% on Canada and Mexico and 10% on China - would reduce their S&P 500 earnings forecasts by roughly 2-3%, while strategists at BofA Global Research said the earnings hit could be as much as 8%.

"If company managements decide to absorb the higher input costs, then profit margins would be squeezed," the Goldman equity strategists said in a note on Sunday. "If companies pass along the higher costs to...end customers, then sales volumes may suffer."

The onset of tariffs raised the risk of an S&P 500 pullback of at least 5% early in the year, Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, said in a note on Sunday.

Strategists at UBS Global Wealth Management on Monday maintained their view the S&P 500 would end the year roughly 10% above current levels, but said "tariffs are likely to represent an overhang on markets and contribute to volatility, at least until investors gain greater clarity on the path and destination of U.S. trade policy."

The UBS strategists recommended gold as "an effective hedge" against geopolitical and inflation risks.

Robeco added to its positions in safe havens gold and U.S. Treasuries late last week because of concerns about market complacency with respect to tariffs, said Colin Graham, the firm's head of multi-asset strategies.

"We’re in a worse position than we were on Friday," Graham said as he watched the initial market reaction unfold on Monday.

FLUID SITUATION

While the tariff threats lent support to some strategists' current allocations and encouraged others to make changes, many warned against knee-jerk reactions to Trump's announcements.

Morgan Stanley equity strategists said the tariffs reinforced their preference for services industries, including financials, software, and media and entertainment, saying in a note on Monday that "we would expect the market to rotate further toward services given recent trade policy implementation."

Concerns about risks from tariffs and geopolitical uncertainty more broadly have led Manulife Investment Management in recent weeks to move into more defensive equity areas and reduce exposure to riskier high-yield credit, said Nathan Thooft, chief investment officer and senior portfolio manager at Manulife.

"But we’re advocating for people to remain fairly calm," Thooft said. "This is still very fluid and the reality is we don’t know what the policies will be."

Baker Avenue Wealth Management had been underweight healthcare stocks coming into 2025 but added exposure to the group in recent weeks because it seems to be relatively immune to tariff risk, said King Lip, the firm's chief strategist. Still, Lip said he thinks Trump recognizes the concerns a trade war brings for the economy and markets, so the situation will be "ratcheted down in a reasonable amount of time."

Indeed, many investors remained doubtful that Trump would allow the tariff dispute to spiral into a full-blown trade war that severely damages asset prices.

Spencer Hakimian, CEO of Tolou Capital Management, a New York-based macro hedge fund, said he was not making any changes to his investment portfolio based on the tariff announcements.

“Trump is bluffing," Hakimian said. "Fade all the noise."

(Reporting by Lewis Krauskopf and Davide Barbuscia; Additional reporting by Suzanne McGee and Carolina Mandl; Editing by Lananh Nguyen and Andrea Ricci)