Retailers, in particular, have stepped up efforts to urge President Donald Trump to reconsider his belligerence. In an open letter earlier this week, Nike Inc. and some 170 footwear companies called his trade policy “catastrophic.”
Department-store chain Kohl’s Corp. partly blamed an 11% cut to its profit outlook on rising tariffs on Chinese goods. Home Depot Inc. estimated that the hit to product costs could be $1 billion a year. J.C. Penney Co. said further escalation -- especially if the latest proposals on apparel and shoes go into effect -- would have a “meaningful impact.”
Companies might be able to pass on the extra costs to consumers by charging more. While a 25% tariff on Chinese imports would crimp S&P 500 earnings by as much as 6%, the lost income could be recovered through a 1% increases in prices, according to estimates by Goldman Sachs.
Will they? Mike Wilson, a strategist at Morgan Stanley, says no. Given stubbornly low inflation, he argues, companies may be forced to cut labor costs instead to salvage margins, a move that could lead to a spike in unemployment and ultimately an economic recession.
Another hazard is that the trade war drags on and equities sell off in the face of persistent uncertainty, hurting consumer and corporate confidence. In recent days, analysts at Nomura, JPMorgan, and Goldman Sachs have rewritten their forecasts, saying the issue will take longer than anticipated to resolve. And a Chinese government expert predicts tensions could last until 2035.
“While at some point a market ‘circuit breaker’ may make concessions more likely on both sides, this path requires market stress and volatility preceded de-escalation,” Wilson wrote in a note. “That stress will only amplify the second order effect” and “add to an already difficult earnings growth environment,” he said.
This article was provided by Bloomberg News.