Strategist explains why tariff fears shouldn't be exaggerated

Investing.com -- The stock market’s rally this week, driven by the absence of immediate tariff announcements under President Trump’s new administration, has led some investors to believe tariff risks may have been overstated, according to the latest Sevens Report.

However, Sevens warned that it’s premature to relax on tariff concerns, highlighting potential volatility ahead.

“‘Day One’ of the Trump administration contained no blatant and additional tariff threats, as investors had feared,” Sevens Report analysts noted. 

Yet, they cautioned, “tariff headlines will remain a consistent source of short-term volatility in markets this year.”

The report points out that Trump’s administration cannot unilaterally impose tariffs without first building a legal case. 

“It’s not a surprise that Trump didn’t announce any new tariffs yet, Said the firm, adding that presidents do not have the power to just decree tariffs, especially with trading partners under existing legal trade treaties approved by Congress.

Trump has directed federal agencies to evaluate trade relationships for potential violations of fair practices, with findings due by April 1. 

The Sevens Report analysts expect tariff risks to increase significantly after that date.

They also highlighted the potential for greater market sensitivity to tariffs compared to Trump’s first term, when the S&P 500 dropped 5% following the imposition of China tariffs in 2017. 

The S&P 500’s forward P/E was 17X-18X then, offering valuation support, they explained. They added that the higher valuations at 21X-22X leave “essentially no room for error.”

While the lack of immediate tariff action has relieved markets, Sevens Report warns, “The risks associated with improperly executed tariffs (which would be higher inflation and slower growth) have diminished in any way.” 

“Bottom line, tariff headlines will continue to be a volatility-inducing event for markets until we have full clarity on the Trump administration’s plans,” the firm concludes.

Source: Investing.com