One of Wall Street’s most optimistic firms has drastically revised its outlook for the S&P 500, citing the negative effects of President Donald Trump’s trade policies, particularly tariffs, on U.S. companies. Deutsche Bank strategists, led by Bankim Chadha, reduced their year-end target for the benchmark index by 12%, from 7,000 to 6,150.
Declining Earnings Expectations
Chadha’s team also revised their earnings forecast for the S&P 500, now predicting a 5% decline in earnings for 2025, compared to a consensus expectation of 8% growth. They further lowered their 2025 earnings per share (EPS) estimate for the S&P 500 from $282 to $240, citing the disproportionate impact of tariffs on U.S. companies.
Tariff Impact on Corporate America
The Deutsche Bank analysts emphasize the significant toll that the tariffs will have on corporate profits, estimating that the new tariff rates could increase the effective tax rate on imported goods from 2.3% to 26.4%, which could result in an $800 billion tax increase. This is more than the total U.S. federal corporate tax revenue of about $500 billion in 2024.
Outlook for US Equities
Despite the bearish forecast, the strategists note that equity positioning has fallen to the bottom of its historical range, suggesting the S&P 500 could experience relief rallies if positive news surfaces. They expect the index to trade within a wide range of 4,600 to 5,600 in the near term, with potential for further volatility.
Recession Risks and Trade Policy Concerns
Deutsche Bank also warns that the U.S. economy could face recessionary pressures if the administration continues its aggressive trade stance. They suggest that a significant policy shift from the government, likely spurred by declining approval ratings, is needed for a durable recovery. However, the longer the current trade policies persist, the greater the risk of economic slowdown. The strategists pointed out that approval ratings often align with economic conditions, particularly consumer confidence, which could lead to a change in direction as the economy begins to show signs of weakness.
