Global Equity Strategy: Read-Through From Latest Tariff Announcements

Citi Research forecasts the latest Trump administration tariffs will impose a ~4 percentage point drag on global earnings growth, with significant regional variations. Europe has largely priced in tariff risks, while Switzerland faces a particularly high 39% tariff, potentially causing a 4-7 pp drag on its 2025 EPS, especially in healthcare. Emerging Markets are vulnerable to a 5-6 pp direct reduction in EPS growth, with further downgrades expected, whereas the S&P 500's ~5% earnings hit is considered manageable. Citi remains overweight on the UK and Continental Europe, but underweight on EM and Switzerland, noting that these tariffs, combined with extended equity valuations and slowing economic signals, could challenge the sustainability of the recent global equity rally.

Analysis

A Citi Research report indicates that newly announced tariffs are projected to create a roughly 4 percentage point drag on global earnings growth. The impact is highly differentiated by region, with Europe having already experienced significant downgrades to earnings per share (EPS) growth forecasts, suggesting much of the risk is now priced in; current 1% EPS growth forecasts for 2025 are considered consistent with a ~20% U.S. tariff scenario. In contrast, Switzerland faces an unexpectedly high 39% tariff, which could reduce its 2025 EPS growth by 4 to 7 percentage points, a significant risk given the healthcare sector's 40% contribution to earnings. While Swiss EPS forecasts have already been cut by 5 pp since April, the direct exposure warrants a cautious outlook. Emerging markets are also vulnerable, with a potential direct EPS growth reduction of 5 to 6 percentage points and a high likelihood of further downgrades from the current 12% growth forecast. The impact on the U.S. is deemed more manageable, with a 15%+ effective tariff rate potentially trimming S&P 500 earnings by ~5%, a risk seen as more sector-specific than market-wide. These tariff headwinds are materializing against a backdrop of extended equity valuations, particularly in the U.S., and early signs of an economic slowdown, raising questions about the sustainability of the recent market rally.

Key Decisions for Investors

• Consider maintaining an overweight position in UK and continental European equities, as current consensus earnings forecasts appear to have already incorporated substantial tariff-related risks.
• It may be prudent to adopt an underweight stance on Swiss and Emerging Market equities due to their direct, significant exposure to new tariffs and the high probability of further negative earnings revisions.
• Within U.S. portfolios, focus on sector-level analysis to identify companies with margin vulnerability to tariffs, as the impact is expected to be concentrated rather than broad-based.
• Exercise caution regarding near-term market upside, as the combination of new trade tariffs, extended valuations, and signs of economic slowing introduces material headwinds for the recent global equity rally.