U.S. stocks have remained steady amid ongoing trade tensions and new tariff declarations, even reaching record highs last week.
According to Morgan Stanley, this durability reflects investors’ cautious approach to risk, supported by several cushioning factors.
Firstly, the direct cost impact from the recent tariff announcements remains relatively limited for most S&P 500 sectors.
“Import cost exposure for S&P 500 industries is more limited thus far given the combination of the countries in scope and the exemptions seemingly still in place,” said strategists led by Michael J. Wilson, highlighting U.S. imports from Mexico under the USMCA as an example.
Secondly, the higher tariff rates introduced on various trade partners are not yet considered final. The market appears to be pricing in the chance that negotiations will lead to moderated or reversed tariff levels.
Additionally, sectors sensitive to tariffs—like consumer goods—have already experienced significant declines, reducing the chance of further sharp drops.
Wilson also emphasized that a substantial tariff hike on China would pose a greater threat, considering the wide range of industries affected and the combined market cap, which exceeds 30%.
Another key risk lies in the potential removal of USMCA exemptions for Mexico, which could expose more products to increased duties. However, at the time of writing, “USMCA compliant goods would be exempt,” according to cited news reports.
“We also think that potential Section 232 tariffs on Semiconductors, in particular, would be a risk,” the strategists added.
Beyond trade concerns, improved earnings sentiment has bolstered equities. Earnings revisions have turned positive, rising from -25% in April to +3% currently.
Morgan Stanley noted that Financials and Industrials have displayed strong relative performance, reinforcing market steadiness despite ongoing macroeconomic uncertainties.
Moreover, with earnings season underway, the growing dispersion in earnings per share (EPS) revisions should provide opportunities for savvy stock picking as companies report results.
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