RBC Warns of a 5-10% S&P 500 Risk as Trump Sparks New Tariff War

RBC Capital Markets has raised concerns over a potential stock market downturn, warning that the S&P 500 could see a 5-10% correction as the U.S. imposes fresh tariffs on China, Mexico, and Canada.

S&P 500 Faces Pullback Amid Rising Trade Tensions

According to RBC strategists, equities were already appearing overbought, and valuations had been slipping from extreme highs. The introduction of new tariffs adds further pressure, increasing the likelihood of a market pullback.

Historically, many macro forecasters downplayed the probability of significant tariffs, treating them as mere negotiation tactics. This contributed to market complacency, as the S&P 500 hovered near record highs. However, the latest policy shift suggests that tariffs are becoming a tangible risk.

Investor Sentiment: A Divided Outlook

Investor reactions have been mixed:

• European investors have been vocal about tariff-related risks in their long-term outlooks.
• U.S. investors remain divided—some share European concerns, others align with macro forecasters who downplay the risks, and some are simply uncertain about the outcome.

Inflationary Pressures and Federal Reserve Uncertainty

Beyond the equity market, RBC highlights inflationary risks tied to tariffs. Higher costs for imported goods could push inflation upward, impacting Federal Reserve policy decisions. This uncertainty creates yet another headwind for stocks.

Public companies have already indicated that they will pass increased costs onto consumers, potentially leading to higher prices across multiple sectors.

RBC’s Market Forecast: A Riskier but Stable Outlook

Despite these risks, RBC maintains its S&P 500 year-end target at 6,600, though it acknowledges that the probability of a downward revision toward its bear case of 5,775 has increased.

Drawing parallels to the 2018 trade war with China, RBC notes that while the S&P 500 suffered a 20% peak-to-trough decline, the current situation may not lead to a downturn of the same magnitude. However, small-cap stocks, which initially benefited in 2018, could face heightened risks as tariffs take effect.

Potential Market Buffers: Navigating the Uncertainty

While the outlook is uncertain, RBC sees mitigating factors that could prevent a severe downturn:

• Corporate resilience – U.S. businesses have adapted to economic challenges in recent years, demonstrating the ability to navigate complex trade policies.
• Equity inflows – Tariffs may hit trading partners harder than U.S. firms, potentially keeping investment flows into U.S. equities strong.
• Policy flexibility – There remains a possibility that these tariffs could be short-lived, reducing their long-term impact on the market.

Final Thoughts: A Cautious Yet Watchful Market

With trade tensions escalating, investors are keeping a close eye on inflation trends, Federal Reserve policy, and corporate earnings. While RBC does not yet predict a major shift in its baseline market forecast, it acknowledges that risks are mounting, making market volatility a key theme for 2025.

(Sources: investing.com, reuters.com, ChatGPT)