Tariffs have put consumers and businesses in a state of limbo since April, and now a US Court of International Trade decision is adding a new layer of complexity.
To try to make sense of the tariff risks on US sectors, we examined their potential impact through three economic scenarios constructed by Preston Caldwell, Morningstar’s senior US economist: The base case, a baseline; the bull case, better than the baseline; and the bear case, worse than the baseline scenario.
While much has been written about tariff risk to technology industries—including by us—we see consumer cyclical and basic materials as the most severely affected market sectors in our bear scenario.
The consumer cyclical sector, which includes retail and apparel, along with vehicles and their parts, takes a direct hit driven by higher costs resulting from tariffs, according to our analysis. While the basic materials sector, which covers companies extracting raw materials used in industries like agriculture and industrial manufacturing, will see a slowdown attributed to sluggish economic growth.
Here, we explain how we created these economic scenarios, and what they’re telling us about the potential impacts tariffs have on sectors and industries.
Why Tariff Impact Matters to Stock Sectors
Understanding how tariffs, and their effect on economic conditions, may influence valuations is vital for investors who want to know how their investments fare under different economic and tariff regimes.
Our analysis examines expected fair value impacts, at the sector and industry group level, across three economic scenarios—the base case, bull case, and bear case—relative to the conditions before tariffs were announced.
This analysis was performed in May. Since then the probabilities of various outcomes have shifted a bit, given President Donald Trump’s decision to pull back on China tariffs as well as court challenges to the tariffs. But broadly, our three scenarios continue to cover the range of most likely outcomes.
Tariff Pain Varies, but Many Industries Face Negative or Very Negative Impact
Our analysis of US sectors shows varied tariff impacts depending on the economic scenario and the sector. While many sectors see limited declines (negative 8% or less) in both bull and bear scenarios, negative (negative 8% to negative 20%) and very negative (less than negative 20%) declines become more common in the base case, and especially with the most severe tariffs proposed.
The most affected sectors and industry groups exhibit the most severe fair value reductions, with predominantly negative or very negative levels.
In this bear case and our base case, we found the following sectors and industries to be the hardest hit:
Hardest-Hit Stock Sectors
- Consumer Cyclical
- Basic Materials
Most Affected Industries
- Retail: Consumer Cyclical
- Vehicles and Parts: Consumer Cyclical
- Asset Management: Financial Services
- Chemicals: Basic Materials
- Metals and Mining: Basic Materials
- Apparel and Accessories: Consumer Cyclical
And while the pain could be significant in certain areas of the market, several sectors and industry groups consistently show a limited decline in fair value across all scenarios.
The consumer defensive sector remains largely intact. Consisting of recognizable companies that are the mainstays of households, the sector includes industries with durability like the manufacturing of foods and beverages, personal products, and education services.
Across all scenarios, these sectors and industries will likely see the least damage:
Least-Hit Stock Sectors
- Consumer Defensive
- Utilities
- Healthcare
Least-Affected Industries
- Software: Technology
- Insurance: Financial Services
- Restaurants: Consumer Cyclical
- Communication Services: Telecommunication Services
- Industrials: Business Services, Conglomerates, Industrial Distribution, and Industrial Products
- Basic Materials: Agriculture
While progressing trade talks with China and other countries, as well as the decision by the US Court of International Trade, have sent the markets back up in recent weeks, investors should remain prepared and forewarned that promising developments could change course or unravel. And understanding how tariffs, and their effect on economic conditions, may affect valuations is vital for investors examining how their holdings fare under different economic and tariff regimes.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.