If tariffs remain in place, they present a significant downside risk to the S&P/TSX Composite Index, according to one strategist who thinks the levies are being used as a negotiating tactic by U.S. President Donald Trump.
Ohsung Kwon, a U.S. and Canada equity strategist at BofA Securities, said in an interview with BNN Bloomberg Tuesday that the overall macro cycle remains “pretty favourable for equities in general,” excluding tariff-related risks. He added the “soft landing environment” is likely to continue, which will benefit equity markets.
Kwon’s comments come amid recession fears for the Canadian economy after an executive order from Trump took effect on 12:01 a.m. ET, hitting Canada and Mexico with 25 per cent across-the-board tariffs, with a 10 per cent levy on Canadian energy. Following the announcement, equity markets on both sides of the boarder declined broadly.
“For the TSX, obviously the biggest risk is if the tariffs that got imposed today are permanent, and we estimate that if this is actually permanent, then it could essentially wipe out the entire EPS (earnings per share) growth that is expected for the TSX for this year, which is about 10 per cent,” he said.
“So that’s going to be very detrimental for the TSX, not only the TSX, but if this becomes more of a global trade war, then it’s going to be very bad for the macro cycle and the equity markets in general. Our house view is that these are not permanent, especially on Canada and Mexico, and if that’s the case, I think we could potentially see (a) relief rally.”
Kwon said he believes tariffs on goods from Canada and Mexico are being used as a means of negotiation to get an updated version of the United States-Mexico-Canada Agreement (USMCA), which was negotiated by Trump in his first term and comes up for renewal next year.
“I think it’s the negotiating tool to review the USMCA and get some sort of a USMCA 2.0. What the U.S. wants to achieve is essentially reshoring, bringing back manufacturing to the U.S. Obviously, bringing everything back to the U.S. is going to be very difficult,” he said.
Kwon added that the countries could compliment each other economically, saying that while the U.S. has a strong consumer base, Canada has commodities and Mexico has cheap labour.
“I think it’s really going to be a North American story, those three countries working together to achieve reshoring, and I think that’s the ultimate goal, and I think it’s going to be pretty bullish for the three countries in general,” he said.
As of 12:45 p.m. ET, Canada’s benchmark stock index fell by 422.08 points to 24,579.02.
The TSX financials subgroup was the biggest downside contributor during early afternoon trading. Shopify Inc. and Royal Bank of Canada were the most influential drags on the index.
TSX ‘getting better fundamentally’
Kwon also highlighted that the Canada cycle indicator for the TSX, which he says is a quantitative indicator correlated to how the TSX preforms versus the S&P 500 Index, recently hit a two year high.
“Things are actually getting better fundamentally for the TSX. The rate differential is at the widest level versus the U.S. Earnings are getting better versus the versus the U.S. So the fundamental backdrop is actually getting better, obviously there is that tariff risk, that’s putting the overhang on the TSX,” he said.
Given the current circumstances, Kwon said he likes the financials, which he notes makes up a larger portion of the TSX compared to the S&P 500.
“Financials is our top sector pick for 2025, and I think there’s a lot going for financials. Obviously, there’s a lot of optimism that got priced in after the election in financials, but the two big bear cases that were in effect after the financial crisis on the banks are regulations, more regulations and rates basically locked in at zero,” he said.
“Those two cases are gone, and with the yield curve steepening and rates basically remaining elevated, and we are still in an easing cycle…the Fed might be done cutting, but rate pressure that really hurt the economy, especially in Canada, that pressure has waned.”
