Tariff "Gray Rhino" Approaches, Vulnerability of US Stocks Set to Be Fully Exposed

According to the Zhitong Finance APP, with the introduction of a series of tariff policies by the Trump administration, the vulnerability of the U.S. stock market in the trade war is about to be fully exposed.

Data from Bloomberg Intelligence shows that the risk resistance capability of S&P 500 index constituent companies has been quite limited over the past twenty years—since 2004, nearly all profit growth in the index has come from the booming technology sector. Excluding technology companies, overall profitability has almost stagnated.

One of the core issues that investors are most concerned about this month is the impact of proposed tariffs on the U.S. economy and corporate profits. The ongoing first-quarter earnings season indicates that even companies themselves find it difficult to estimate potential shocks, further exacerbating market anxiety.

Paul Nolte, market strategist and senior wealth manager at Murphy & Sylvest Wealth Management, stated: "The S&P 500's ability to absorb the impact of tariffs is not only weaker than it appears on the surface, but I believe that due to the presence of tech stocks, the index is actually more sensitive to tariffs."

According to estimates from Bloomberg Economics, although the Trump administration is negotiating trade deals with over 50 countries, the average tariff rate remains around 22.8%, and could even rise to 32.6% depending on the negotiation outcomes. Such high tariffs are bound to severely impact U.S. companies, leading to rising costs and shrinking profits.

Thin Profit Cushion

The profit margin growth of non-tech companies in the S&P 500 index over the past twenty years has been lackluster, meaning that once tariffs become a significant obstacle, most U.S. companies within the index have almost no buffer to absorb the shock and achieve growth.

Bloomberg Intelligence estimates that the average operating profit margin for S&P 500 constituent companies in 2025 will be 16.4%, but will plummet to 13.5% when excluding the tech sector—this estimate may not fully reflect the potential impact of new trade policies. The tech sector is expected to generate an astonishing profit margin of 34.1% this year.

Matt Maley, chief strategist at Miller Tabak + Co., stated: "It is no coincidence that tech giants are leading the market in 2023-2024—while other sectors struggle, they are generating huge profits."

Maley believes that what is more concerning is that the market is broadly lowering its earnings expectations for this year. Data compiled by Bloomberg Intelligence shows that analysts currently predict a profit growth rate of only 7.9% for the S&P 500 index in 2025, a significant reduction from nearly 13% at the beginning of the year.

Maley stated: "If even the only sector driving growth loses momentum, many investors will still be caught off guard, even after recent declines." He pointed out that the sell-off triggered by Trump's tariff increases on trade partners on April 2 is a clear example This is undoubtedly a wake-up call for investors who have enjoyed the surge in U.S. stocks driven by technology stocks over the past few years. Due to the market capitalization weighting mechanism, the technology sector has a significant impact on the overall performance of the S&P 500.

Considering that technology stocks are still in a high valuation range and their enormous weight in the index, the prices of this sector are highly volatile and may drag down the overall market performance.

Michael O'Rourke, Chief Market Strategist at JonesTrading, stated: "Tariffs will severely impact the largest profit growth engine of this benchmark index, and the technology sector is likely to become the biggest factor dragging down the index's profitability."