Are corporates ready for tariffs?
In the aftermath of the U.S. election result, corporates and investors have been striving to anticipate the potential impacts.
According to Lori Calvasina, Global Head of Equity Strategy at RBC Capital Markets, companies are trying to reassure investors that they are prepared for any disruption from trade tariffs imposed on China by the Trump administration.
She believes the focus on China may be misguided: “The new administration has indicated they might want to pursue more broad-based tariffs.” Whatever costs arise from tariffs, higher inflation will be the ultimate result, she adds.
Not all sectors are anticipating a negative impact. Calvasina notes that financials avoid the direct effects of trade wars. They could also benefit from a freeze or cut to corporate taxes, and from looser regulation.
Yields, currency, rates determine equities’ direction
The 10-year Treasury yield has seen a rise of late, sitting comfortably above 4%. Calvasina points to the pattern in 2023, when equities were unable to shift upwards until the 10-year yield had peaked.
While investors are not too worried about the current level, she believes, “they are concerned that we might make another run towards 5%, which they would view as more challenging for equities.”
The recent rise in the dollar is also likely to have an adverse effect on most companies, particularly in sectors such as industrials and materials. Calvasina believes this may trigger a shift away from the recent trend to invest in these cyclical sectors.
Overall, the market is slightly overvalued at present, in Calvasina’s view. Her team foresees a more positive 2025, but only if inflation and interest rates continue to moderate and the 10-year yield shows improvement.
“If we don’t get those things, PE multiples are going to need to come down,” she says, noting that indices show multiples currently creeping to the upper end of their historical range.
Small cap gains make an early comeback
During the first Trump administration, small caps benefited from corporate tax cuts and from the perception that they offered better protection from the China trade war.
This time round, small cap positions were already positive in advance of the election, Calvasina says, returning to highs seen in 2016, 2017 and 2018.
“It’s hard to say the small caps have absolutely topped out, but it does look like they’ve at least pre-traded some of the optimism associated with the Trump victory,” she concludes.
“Small caps have at least pre-traded some of the optimism associated with the Trump victory.”
Lori Calvasina, Global Head of Equity Strategy, RBC Capital Markets
