Trump’s tariffs are coming to inflict pain on corporate earnings from Wall Street to the ASX

We could be near the start of the ‘Trump downgrades’. Tariff uncertainty may well have peaked in April, but that misses the point that markets have soared to record highs and volatility has plunged since then.

US President Donald Trump plans to impose a 50 per cent tariff on copper imports. Picture: Spencer Platt/Getty Images/AFP

We are approaching the season of the Trump downgrades, where company earnings estimates are being whittled back to reflect the damage inflicted on profits from the tariff war.

Investors wouldn’t know it if they were watching key shares benchmarks – notably the DAX 30, the Euro Stoxx 50 and the Nasdaq Composite which hit record highs on Wednesday, the latter led by the unstoppable Mag 7 and tech darling Nvidia.

Volatility as measured by the CBOE VIX index hit a five-month low of 15.94, well below its long-term average of 19.50, even as US President Donald Trump fired up the trade war.

After stalling since early April when his trade war tanked stocks, Mr Trump is again threatening country-specific tariffs ranging from 10 to 70 per cent with a new start date of August 1, this time with “no exceptions”. He also confirmed a 50 per cent tariff on copper will start the same day, and warned of tariffs of up to 200 per cent on drug imports.

S&P 500 futures fell slightly as Brazil was set to defy Mr Trump’s warning not to retaliate.

Brazil’s President threatened “reciprocity” on US goods in response to a new tariff set at 70 per cent.

But Australia’s S&P/ASX 200 rose 0.6 per cent to 8590 and flirted with a record high daily close.

Mr Trump slashed his China tariffs on May 12. But at this stage he has drawn a line in the sand for August 1.

US President Donald Trump speaks during a multilateral lunch with visiting African Leaders at the White House in Washington. Picture: Jim Watson/AFP

Ever since Mr Trump delayed his country specific tariffs on April 9, investors have said the “direction of travel” is improving. Markets had passed “peak uncertainty” about tariffs, they thought.

Tariff uncertainty may well have peaked in April, but that misses the point that markets have soared to record highs and volatility has plunged since then. The average effective US tariff is still expected to be about 14-15 percentage points, and the direct and indirect impacts are largely yet to play out.

In terms of US inflation impacts, Goldman Sachs notes that while the largest tariff hikes went into effect in early April, goods already shipped were exempt, and it takes about a month for distant imports to reach the US. Many tariffs only began to have an impact around early May.

Customs and Border Protection allows importers using the automatic payment transfer system to delay their tariff payments for up to 1.5 months. Frontloading of imports and uncertainty over whether tariffs would stick may have also helped to delay increases in consumer prices.

Much of the impact on corporate earnings and economic growth overseas is also yet to play out.

Markets are “looking through” the tariff impact, which is understandable to some extent.

But they can’t be sure tariffs won’t stick, and they don’t know how big the economic impact will be.

If it causes a recession, all bets are off, as it will take time for rate cuts to support growth.

Apart from the “TACO” factor (Trump always chickens out), markets often look through such shocks.

But the big difference in the pandemic was unlimited monetary policy stimulus juicing valuations.

Combined with unlimited fiscal stimulus, that meant the economic downturn was very brief.

But while US tariffs support rate cuts outside the US, the Fed has put cuts on hold over inflation concerns. And unlike the pandemic, a trade war isn’t a good pretext for unlimited policy stimulus.

On the earnings front, Citi slashed its Breville Group share price target by 16 per cent to $32.10 after lowering its earnings forecasts to account for expected tariff impacts.

Breville is expected to be hit from the new tariffs.

Citi cut its earnings forecasts by 12 per cent for the next two financial years, reflecting lower gross margins resulting from tariffs and higher costs to manufacture in new countries.

But it’s not yet assuming any impact to sales from potential consumer weakness.

“Taking a step back, we see significant opportunity to grow via category tailwinds, new product development and geographic expansion, but we are cautious in the near term with FY26 consensus still yet to fully reflect the impact from tariffs, and given elevated uncertainty around the extent that Breville will be able to offset the tariff impact without causing a reduction in end consumer demand, and whether product quality can be maintained from new sourcing regions,” the broker said.