US tariff crisis: short-term weakness, but a potential bounce ahead

Here's my simple 10 pence worth of how I suspect this whole US tariff mess might play out for investors.

Over the next couple of weeks, equity markets will remain weak as the US Q1 earnings season kicks off, with Boards cutting their guidance given the elevated uncertainty - in turn, lowering S&P 500 EPS expectations for 2025 from $270/share.

That said, a lot of last week's distressed selling was hedge funds being forced to liquidate their positions and/or post extra collateral with their prime brokers (archive.ph/WbOcv). Once this stops, we'll hopefully see a mini bounce.

More positively - unless, of course, I'm completely off the mark - this all feels like a big negotiation play by Trump (think Ukraine and Russia). Just read his book The Art of the Deal.

If correct, then Trump is trying to pick off each country individually in order to rebalance US trade deficits - even with countries that have similar or lower import tariffs.

Plus, next week I suspect the president will start shouting about how his policy is actually working - after striking initial trade deals with the likes of Vietnam, Cambodia, India, UK, Mexico, and possibly Canada.

Here, Trump is likely to force these countries to buy US oil, LNG, soybeans, agricultural products, and possibly even cars - boosting exports and voter support at home, particularly in the industrial rust belt and Midwestern prairies.

All while leaving countries that choose to implement retaliatory tariffs (eg China and the EU) isolated and at a material disadvantage compared to their overseas rivals.

The key question is, how long will this 'trade normalisation' process take to play out?

No one knows. But given it is in everyone's interest to sort the mess out quickly, I suspect a lot of the heavy lifting will be agreed over the next 1-2 months.

Until then, many US consumers, importers, and corporate buyers will likely slow down their purchases of overseas goods, waiting for the tariffs to drop and stabilise at lower levels - essentially gamifying Trump's own game, as they have already done by front-loading imports over the past three months (reflected in higher inventories).

If this is broadly correct, then smart investors should start to see this scenario play out fairly quickly. So, despite more short-term volatility, I'm hopeful that by summer much of this uncertainty will have cleared up for everyone's benefit.

Big picture of course, this is a man-made issue. So in theory, there is a man-made solution.