How US equity investors should navigate the impact
Economy & Business
By IFAST RESEARCH TEAM
LIBERATION Day is finally here, and it’s anything but pleasant.
US President Donald Trump has just escalated his global trade war by implementing a universal 10% tariff on all imports. Additionally, he has announced reciprocal tariffs for 60 countries identified as the “worst offenders,” with China facing a 34% reciprocal tariff and the European Union (EU) a 20% rate. For China, this new reciprocal tariff will be added on top of the existing 20% tariff, bringing the total rate to a whopping 54%.
Trump’s latest move took many by surprise and is likely bleaker than many of the worst-case scenarios for his trade policies envisioned just a few days ago. Before you panic and make hasty changes to your portfolio, we urge you to stay calm.
Reciprocal Tariffs Proved to be Aggressive
The S&P 500 fell 4.84% on April 3, after Trump escalated trade tensions by unveiling sweeping tariffs on Liberation Day.
Hopes for a lighter tariff approach were dashed as Trump imposed a 10% baseline tariff on all US imports and additional duties on roughly 60 countries with which the US has the largest trade deficits (Table 1). This includes a 34% reciprocal tariff on China, bringing the total tariff on China to 54% —just shy of the 60% Trump had pledged during his re-election campaign.
The 10% universal tariffs took effect on April 5 and the higher reciprocal tariffs on April 9. Meanwhile, auto tariffs took effect on April 3. Fortunately, Canada and Mexico were spared from new tariffs, though non-US-Mexico-Canada Agreement (USMCA)-compliant goods remain subject to a 25% tariff.
Overall, according to Bloomberg Economics, the average effective tariff rate of the US has risen from 2.3% in 2024 to 22% — the highest in over a century.
US Consumption to Come Under More Pressure
Trump’s latest tariffs introduce further downside risk to US economic growth and upward pressure on inflation. Contrary to his belief that foreign countries would absorb the cost, tariffs are borne by importers, who typically pass the burden onto US consumers.
Since the US lacks the manufacturing capacity to replace all of its imported goods, consumers are left with no choice but to pay higher prices. Higher prices are likely to lead to reduced demand and with consumer spending accounting for nearly 70% of GDP, we could see a contraction in GDP should tariffs remain at current high levels for a prolonged period.
In addition to announcing new tariffs, Trump has eliminated de minimis tariff exemptions, which previously allowed packages worth up to US$800 (RM3,595) from China and Hong Kong to enter the US duty-free.
This change will hurt price-conscious consumers, particularly those who have been importing cheap goods directly from Chinese discount marketplaces like Temu and Shein.
Selectivity Matters when Buying the Dip
Baron Rothschild famously said that “the time to buy is when there’s blood in the streets”. While this contrarian investing adage remains just as relevant today as it was in the 18th century, we recommend a selective approach when buying the dip. Investors should focus on high-quality companies whose share price declines are driven more by market sentiment than by a potential significant deterioration in earnings.
Retailers, for example, are likely to face substantial earnings pressure as Trump’s tariffs on major Asian markets undermine their previous efforts to shift production away from China. Lululemon manufactures 40% of its products in Vietnam and 17% in Cambodia, while Nike Inc produces 50% of its shoes in Vietnam and 18% in China.
We prefer industries whose earnings are tied to long-term structural trends (eg artificial intelligence (AI), digitalisation) as their earnings would be better supported by sustained demand. This includes companies from the semiconductor industry and the broader tech sector.
Within tech, software companies (eg Alphabet Inc, Meta Platforms Inc, Microsoft Corp) may be more resilient than hardware companies like Apple Inc, which outsources manufacturing to Asian countries facing high reciprocal tariffs, including China, India and Vietnam. That said, while Apple’s earnings could face near-term pressure, its strong balance sheet should provide the flexibility to navigate these challenges and sustain its share buyback programme, helping to support the stock.
Another tech stock of concern is Amazon.com Inc, which relies heavily on third-party Chinese merchants for goods sold on its e-commerce platform. Although Amazon’s sales may moderate, we expect the impact to be offset by continued growth in its Amazon Web Services (AWS) and advertising segments.
Furthermore, the elimination of the de minimis rule could potentially benefit Amazon by making goods from Temu and Shein less attractive.
The semiconductor industry received a temporary reprieve as chips were exempted from the latest tariff announcement. This means that US companies like Nvidia Corp will not be subject to the 32% tariffs Trump imposed on Taiwan for chips imported from Taiwan Semiconductor Manufacturing Co Ltd (TSMC).
However, in an interview aboard Air Force One following the tariff announcement, Trump stated that tariffs on foreign-made chips “are starting very soon”. Nevertheless, we still expect global chip demand to remain strong in the current semiconductor upcycle, with the top holdings of the MVSMHTR Index (eg Nvidia, TSMC, AVGO, ASML) likely to achieve high double-digit earnings growth between 2025 to 2027.
Uncertainty Remains a Problem after Liberation Day
Far from providing a definitive resolution, the reciprocal tariff announcement has injected significant uncertainty into the global trade landscape. The lack of a concrete timeline for tariff removal, contingent upon Trump’s subjective assessment of trade deficit mitigation, leaves markets in a state of prolonged ambiguity.
Furthermore, it is unclear how open Trump is to negotiation, given that tariffs are necessary to partially fund his tax cuts plans. The threat of retaliatory measures from major trade partners, such as China and the EU, may also result in further trade escalations.
Nonetheless, we still see opportunities in the US market and recommend that investors to take a selective approach towards investing.
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