The complacency around tariffs is dissipating. The stock market is starting to price in lower earnings, partly due to the impact of tariffs. While the Trump administration has argued against this, the market believes tariffs mean higher inflation and lower growth. After Trump's election, the stock market initially rallied on Trump's promise of less regulation and a pledge to cut corporate taxes from to 15% from 21%. Investors and analysts chose to ignore tariffs because it was widely believed Trump would not implement them. Earnings disconnect This created a disconnect between stock prices and earnings: stock prices had been rising, however earnings estimates "have not been improving as it had initially [been] anticipated would occur under Trump," Nick Raich at Earnings Scout told CNBC. Earnings estimates have not been rising as fast as anticipated because analysts have not been getting clear signals from corporate America. Now, the belief that Trump would not implement tariffs has dissipated, and that may open the floodgates for lower earnings estimates. "The market may have believed Trump is bluffing, but if global leaders come to believe he is bluffing, this could ignite a global trade war," Raich said. Analysts cutting earnings more than usual It's not just tariffs, Marc Chandler from Bannockburn Forex told CNBC. "There is a stew of headline risk out there, everything from tariffs to a growth slowdown to inflation, DOGE, and budget issues," he told CNBC. "This is not just about tariffs, this is about a different world view." It's still early, but this "stew" of headline risk is starting to find its way into earnings estimates. It's typical for analysts to reduce earnings estimate in the first part of the quarter. They do this because analysts are historically bullish and typically adjust their estimates downward as they realize they have been too optimistic. But the numbers are coming down faster than usual. According to John Butters at Factset, first quarter earnings for the S & P 500 decreased by 3.5 percentage points from December 31 to February 27. That is a larger decrease than the 5-year average (2.6%), the 10-year average (2.6%), the 15-year average (2.4%), and the 20-year average (3.1%). These are not huge cuts, but the recent price action in the stock market indicates investors are nervous these cuts may get much larger. At LSEG, which uses a similar database, all 11 S & P 500 sectors have seen declines in estimates this quarter, but there has been a significant decline in estimates in cyclical sectors such as consumer discretionary and industrial stocks — those tied closely to the state of the economy. First quarter earnings estimates: declining faster than usual Consumer Discretionary Jan. 1: up 10.9% Feb. 28: up 1.1% Industrials Jan. 1: up 12.3% Feb. 28: up 5.6% Materials Jan.1: up 10.2% Feb. 28: down 5.9% Source: LSEG Some companies are already making specific warnings on tariffs. Target and Best Buy this week both warned that tariffs will drive prices higher for the consumer. What side of the Trump bet are you on? Ultimately, this all boils down to what side of the Trump bet you are on. Are you on the side that believes global leaders are going to call his bluff and cause a trade war, or are you on the side that believes Trump will negotiate his way out of a trade war and leave very little damage behind? Opinions are split. "The bottom line is the market does not like taking Trump at face value, because he is too mercurial," Alec Young at MAPsignals.com told me . "I don't think Trump wants to crash the global economy." Marc Chandler is also in that camp: "Most people still believe there will be a deal that will be worked out," he said. Others are less sure. "Trump is predictably unpredictable," Raich told me, acknowledging that many still believe he will be able to negotiate some kind of deal that would enable him to back off on tariffs. "This is a dangerous game of chicken, and the market has not fully priced this in." Commerce Secretary Howard Lutnick, in an interview on Fox Business, hinted President Trump may propose a compromise: "You do more and I'll meet you in the middle some way," he said. Others may not have a strong opinion one way or the other, but are astonished at the level of day-to-day headline risk. "I leave my desk, and I come back and say, 'What just happened?,'" Jay Woods from Freedom Capital Markets told CNBC. "Trump doesn't give us a break."
