Over the weekend we reported that as increasingly more banks evaluate the worst case scenario in the ongoing US-China trade war, we highlighted that Goldman Sachs, which assigns a 60% probability the US will impose tariffs on most or all of the additional $267 billion of imports from China that are not covered by the tariffs announced to date, issued a warning that whereas so far S&P profits and margins have been able to avoid a direct hit, this may change soon:
“Tariffs threaten corporate earnings through higher costs and lower margins. Conservatively assuming no substitution or pass-through of expenses, we estimate a 25% tariff on all imports from China could lower our 2019 S&P 500 EPS estimate by roughly 7% (from $170 to $159), resulting in no EPS growth next year.”
And while Goldman did not predict a severe impact to either the market or stocks, the bank’s chief equity strategist David Kostin repeated an analysis he made three weeks ago, warning that if trade tensions spread significantly and a 10% tariff were implemented on all US imports – the highest rate since 1940s – the bank’s EPS estimate could fall by 15% to $145 in the “severe case”, resulting in a bear market for equities; a less draconian scenario of imposing 25% tariffs on all Chinese imports would wipe out all corporate profit growth in 2019.
As it turns out, Goldman’s analysis made its way all the way to the White House, and on Tuesday Kevin Hassett, the chair of President Donald Trump’s Council of Economic Advisers, took heavy aim at the Goldman Sachs research team, which he claimed was overtly political and negative toward Trump’s policies.
Asked during an interview on CNN about the conclusion of the analysis by the Goldman equity strategists – which as noted above showed that Trump’s potential tariffs could wipe out corporate profit growth in 2019 and offset all the stimulative benefits of other policies, Hassett compared the analysts to the Democratic Party.
“I haven’t read that report, but the Goldman Sachs economic team almost at times look like they are the Democratic opposition,” Hassett said, which is ironic as it was former Goldman COO, Gary Cohn, who led Trump’s economic team for over a year.
Hassett dismissed those concerns, and pointed to Goldman Sachs’ previous analysis that the GOP tax cut bill would do little to boost economic growth, which was “really, really wrong and timed in a partisan way” and served as evidence the bank’s latest analysis was flawed.
“Their analysis of the tax cuts was really, really wrong,” Hassett said. “And timed in a partisan way. So maybe they are trying to make a partisan point before the elections.”
Lastg year, ahead of the passage of the GOP tax law, Goldman economists estimated that the tax law would boost US GDP growth modestly, by only 0.3% in 2018 and 2019.
Hassett’s comments came as the Trump administration has taken aggressive steps to defend the decision to start a trade war with China. On Monday, the president hit back at critics of the tariffs during a press conference announcing the new US-Mexico-Canada trade deal: “By the way, without tariffs, we wouldn’t be talking about a deal,” Trump said. “Just for those babies out there that talk about tariffs.”
Watch the exchange below.
White House CEA chair Kevin Hassett attacks the Goldman Sachs research team for a note estimating flat 2019 S&P earnings growth if Trump goes through w/ tariffs on all Chinese goods. Accuses Goldman of “trying to make a partisan point before the elections” https://t.co/MTxKHqc18F pic.twitter.com/YjoLOFocKD
— Bob Bryan (@RobertBryan4) October 2, 2018
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