The S&P 500, Britain\u2019s FTSE 100 and the MSCI All Country index have powered to new highs this week, and other global benchmarks are not far behind. Analysts at Goldman Sachs and other big banks have recently been raising their year-end S&P 500 forecasts by as much as 10 per cent.<\/p>\n
The catalyst is clear: baseline tariffs on imported goods into the U.S. will be much lower than the duties U.S. President Donald Trump<\/a> had threatened previously. It emerged this week that the levy on Japanese goods will be 15 per cent, not 25 per cent, and indications are that a deal with the European Union will land on 15 per cent too. That\u2019s half the rate Mr. Trump had threatened to impose.<\/p>\n Suddenly, the picture is nowhere near as bleak is it looked a few months ago. Economists reckon that the final aggregate U.S. tariff rate will settle around 15-20 per cent once deals with Brussels and Beijing are reached, a level markets are betting won\u2019t tip the economy into recession.<\/p>\n This suggests that Mr. Trump\u2019s seemingly chaotic strategy \u2013 threaten mutually assured economic destruction, extract concessions and then pull back to limit the market damage \u2013 is paying off. But will it?<\/p>\n Despite the market euphoria, the fact remains that on December 31 last year, the average aggregate U.S. tariff on imported goods was around 2.5 per cent. So even if that ends up in the anticipated 15-20 per cent range, it will still be at least six times what it was only a few months ago, and comfortably the highest it has been since the 1930s.<\/p>\n U.S. Treasury Secretary Scott Bessent estimates that tariff revenues this year could reach US$300-billion, which is the equivalent to around one per cent of GDP. Extrapolating last year\u2019s goods imports of US$3.3-trillion to next year, a 15 per cent levy could raise close to US$500-billion, or just over 1.5 per cent of GDP.<\/p>\n So who will pick up that tab? Is it the U.S. consumer, importers or the overseas exporters? Or a mixture of all three? The likelihood is it will mostly be split between U.S. consumers and companies, squeezing household spending and corporate profits. Either way, it\u2019s hard to see how this would not be detrimental to growth.<\/p>\n We may not know for some time, as it will take months for the affected goods to come onshore and get onto U.S. shelves and for the tariff revenues to be collected.<\/p>\n \u201cWe\u2019ve got a ways to go before we can really say the U.S. economy is feeling the full effect of the tariff policies being announced,\u201d Bob Elliott, a former Bridgewater BWB-Q<\/a> executive and founder of Unlimited, told CNBC on Wednesday.<\/p>\n But in the meantime, equity investors appear to be ignoring all of this.<\/p>\n The market\u2019s short-term momentum is clear. The S&P 500 has closed above its 200-day moving average for 62 days in a row, the longest streak since 1997, according to Carson Group\u2019s Ryan Detrick. And the \u2019meme stock\u2019 craze is back too, another sign that risk appetite may be decoupling from fundamentals.<\/p>\n