Yesterday, we reduced the odds of our Roaring 2020s base-case scenario from 65% to 55% and raised the odds of a stagflationary scenario from 35% to 45%. The latter includes the possibility of a shallow recession later this year, following a buy-in-advance shopping spree during April and May. We did so because Trump's Reign of Tariffs imposed a 25% permanent tariff on imported autos and auto parts last week (effective April 3), the same rate as on imported steel and aluminum (effective March 12). That will raise auto-related prices and costs for consumers and depress auto sales (after a short buying binge). That's just one example of how Trump's tariffs are likely to be increasingly stagflationary later this year. The latest development in the Reign of Tariffs is that Trump wants a 20% tariff on all goods imported from all countries.
We still expect that the Roaring 2020s scenario will prevail over the remainder of the decade, as it has so far, but after six to 12 months of heightened stagflationary risks for now. So we are lowering our outlook for S&P 500 earnings per share and our S&P 500 stock price targets for 2025 and 2026. We are still targeting 10,000 for the S&P 500 by the end of the decade.
A happy outcome would be that the US would negotiate tariff reductions, but that won't happen if the US slaps a 20% tariff on all imports across-the-board just because Peter Navarro has convinced the President that tariffs will bring $6 trillion in revenue over the next 10 years.
Consider the following:
(1) Industry analysts following S&P 500 companies are scrambling to lower their quarterly earnings estimates for H1-2025 (chart). They might continue to do so and cut their H2-2025 estimates more aggressively after Wednesday, when the administration will roll out more tariffs and other countries will likely respond in kind.
