Every week seems to bring a new twist in the bizarre and unnecessary trade war started by the Trump administration, which is hurting many companies and consumers but is thus far having little impact on the major US equity market indices, though it is pushing the US dollar down. The latest headlines indicate higher tariffs on Japan and South Korea, and possibly more to come.

Since Mill Street has long focused on earnings estimate revision indicators as a way to track “fundamental momentum” in earnings using our own measures of changes in analyst earnings forecasts, we can look to see what those indicators are saying now about the impact of tariffs/trade on various industries.

Services vs goods

When we review the aggregated indicators of analyst earnings estimate revisions across all 74 GICS industries globally, we see a clear distinction between industries that primarily offer services and/or are highly domestic and those that buy, sell, or transport physical goods that may at some point cross borders. This of course makes sense given that tariffs are imposed on goods crossing borders and not services in most cases. Other US policies related to immigration and education may also impact US companies that use immigrant labor or rely on international students, or simply receive any federal money (research grants, etc.). However, many such companies or schools are not publicly traded and thus will not be visible in our data, though will impact the US economic data at some point.

The main indicator we tend to focus on is what we call “revisions breadth”, meaning the net proportion of positive vs negative revisions to next-12-month earnings forecasts by the equity analysts covering a stock. It can range from -100% if all analysts are cutting EPS forecasts, to +100% if all analysts are raising forecasts (using estimate revisions that have occurred in the last 100 calendar days). We average the revisions breadth for all stocks in each industry using our global database of over 6000 companies (all of which meet minimum requirements for analyst coverage, market cap, and liquidity).

Which industries are at the top of the list?

The chart below shows the top 15 among the 74 global industries based on estimate revisions breadth. It highlights some key themes in earnings trends globally:

Source: Mill Street Research, Factset

• Utilities are among the strongest industries, as they have very little exposure to tariffs (or currency movements) and many also have increasing demand for electricity and related energy usage. Their costs and revenues tend to be stable and use longer-term contracts.
• Diversified Consumer Services is at the top, a relatively small industry that has a wide variety of constituents but has a lot of education-related companies, often online schools. These service-based businesses also have little direct exposure to tariffs/trade.
• Banks and Insurance – most Financial firms do not have significant exposure to globally traded goods, and are much more sensitive to interest rates, markets, and the overall economy. Banks and Insurance companies globally (less so in the US) are benefiting from gradually declining interest rates (especially in Europe) as well as pricing power for some insurance companies.
• Software is the leading industry within Technology, and by nature has less exposure to tariffs given that most software and related services are not subject to tariffs. Software also has strong secular demand growth.
• Aerospace & Defense, Transportation Infrastructure, Construction & Engineering – these industries are tied to other themes beyond tariffs: war/defense, infrastructure spending, and demand for air travel. Increased defense spending tied to Russia/Ukraine as well as the Middle East has helped defense stocks, particularly in Europe. The same is true for infrastructure spending, which was strong in the US but is now fading while it is poised to increase in Europe. Air travel demand and the corresponding need for aircraft, parts, airports, etc. is also a key global theme, though mostly outside of the US (international travel to the US has fallen sharply, hurting US tourism-related industries).

So we see that most of the industries with the best relative fundamental trends globally have little exposure to tariffs (goods that cross borders) and other trade disruptions, and/or benefit from other trends like defense and infrastructure spending or electricity demand.

Note that the average stock globally has negative revisions breadth (about -9%), as is often the case, though right now the average is somewhat below the historical norm. This captures the tendency for equity analysts to start with high initial earnings estimates and then trim them as time goes on, so there are slightly more downward than upward revisions to estimates even if earnings themselves grow over time. So any positive average revisions breadth for an industry means it is notably above average right now.

Bottom of the list: lots of “stuff”

Turning to the 15 industries that have the most negative estimate revisions activity globally (chart below), we see a lot more of those connected to making, selling, or transporting “stuff”, i.e., physical goods that cross borders themselves or rely on inputs that do.

Source: Mill Street Research, Factset

• Automobiles stands out because it is not only an important industry globally but one that is in the crosshairs of tariffs and other trade barriers as well as a major secular shift toward electric vehicles. Estimates are being cut aggressively in the industry amid the tariffs, signs of slowing economic growth in the US, and relatively high US interest rates.
• Textiles Apparel & Luxury Goods is another industry that is heavily exposed to tariffs as many are made in one place (or places) and sold somewhere else. There are also impacts from China’s economic weakness that affects Europe more than the US given its greater exposure to China via exports. The Leisure Products industry has a lot of the same exposures.
• The same is true in many ways for Staples industries like Household Products and Beverages. These tend to be very global industries, with factories in many places and lots of products moving all around the world.
• Ground Transportation and Air Freight & Logistics capture the weakness in trucking and shipping that is related to reduced trade, especially between China the US. All the imports and exports that are not happening due to tariffs reduce the demand for trucking, rail, and air freight to move the goods.
• Chemicals is a fairly large industry globally and is a traditional cyclical industry tied to overall economic growth and trade. Chemicals, especially petrochemicals used in plastics, etc. are widely used in consumer and industrial products that are traded globally and thus constrained by tariffs.
• Energy Equipment & Services is weak due to not only tariffs that are driving up the cost of steel and aluminum used in much of the oil service equipment, but also the weak price of crude oil due to tariffs hurting demand and OPEC choosing to increase oil supplies. There is plenty of oil around and little need to expand drilling, especially with global oil demand gradually declining.

Overall, there are many clear connections between the estimate revisions trends in global industries and the relative impact of tariffs and other trade-related barriers, along with the general slowdown in economic activity that will come with the trade war and other policy changes. And these readings are what we see now, about three months after the initial “Tariff Day” announcements on April 2^nd and all of the subsequent “pauses”, “deals”, and other changes (including some new additional tariffs on specific products). So while the equity markets have mostly recovered (though more the large-caps than small-caps), analysts are still trying to reflect the complex impacts of these monumental economic policy changes in their earnings forecasts. Earnings reports for Q2 will start soon and bring more information about the impact of policy changes is affecting corporate profits.

Mixed macro backdrop, but economic slowing more likely than acceleration

While AI-related spending is clearly still helping the US Tech-related stocks do well, much of the rest of the world and many other industries are clearly facing headwinds. And while lower interest rates (which may take a while longer to see in the US) may help somewhat, monetary policy cannot outweigh fiscal policy when the fiscal policy changes are so large. Fiscal policy is contractionary in the US (despite the recent passage of the giant tax and immigration bill), but is looking to be more expansionary in Europe, creating a lot of cross-currents along with the sharp weakening in the US dollar since January. Notably, the weaker US dollar will give some help to US multinationals when they translate overseas earnings back to dollars, but will hurt importers (often smaller companies). Amid the weaker dollar and continued late-cycle (slowing growth) conditions, we would continue to favor large-caps over small-caps, especially in the US.

Stock prices and fundamentals do align eventually, but often not in the short run, and much depends on assumptions about future policies and how companies and consumers will respond. Investors may choose to hope that the tariff headwinds will go away or be milder than expected, but analyst estimate activity shows a clear relative impact of tariffs on exposed industries.