Originally published March 4, 2025
Key takeaways:
- Canada and Mexico are striking a careful balance in retaliating against U.S. tariffs
- We think President Trump sees tariffs as a negotiating tool
- We don’t believe investors should consider making portfolio changes yet
***Posted at 2:30 Pacific time***
With U.S. tariffs on Mexican and Canadian imports now in effect, yesterday’s risk-off market mood continued today. Both Canadian and U.S. equities modestly sold off.
Balancing act
Retaliation from key U.S. trading partners demonstrates that they are striking a careful balance. On the one hand, Canada and Mexico want to demonstrate their frustration and opposition to U.S. tariffs. On the other hand, they want to leave room for negotiating a mutually beneficial end to the trade standoff.
For instance, Canada is imposing retaliatory tariffs on a subset of U.S. imports, but these tariffs may only extend to around one-third of U.S. imports. Meanwhile, Ontario’s premier has responded with a 25% export tariff—but only on electricity.
China has announced it will impose counteracting tariffs on select agricultural products, with a levy of up to 15%. While Chinese officials have imposed additional restrictions on certain U.S. companies, several of these companies are U.S. defense suppliers that have limited or no direct sales exposure to China.
For its part, Mexico has promised countermeasures, but it is waiting until Sunday to reveal specifics. President Sheinbaum hopes to iron out a deal with President Trump over the weekend.
Right now, our view is that markets haven’t shifted enough for investors to consider making changes to their portfolios.
Lessons learned
Even with tariffs taking effect, we believe that President Trump continues to view them as a negotiation tool. He has still not adopted the universal tariffs that he floated on the campaign trail. Nor has he ratcheted up the tariff on China’s imports to 60%.
And while there’s a risk that the U.S. escalates the trade standoff further by unleashing new tariffs, it’s also possible that the U.S. will dial down or remove tariffs in a future deal. For instance, after the close of trading, Commerce Secretary Howard Lutnick mentioned that there could be some “tariff relief” provisions as soon as tomorrow.
We still believe this trade standoff will weigh most heavily on Canada and Mexico, while having a more modest effect on America and China. But the exact magnitude of the impact will depend on a key unknown—how long these tariffs remain in effect for. A protracted standoff could tip Canada and Mexico into recession.
Don’t panic
As for valuations, U.S. stocks still look somewhat frothy, even after the recent pullback, with the forward P/E ratio on the S&P 500 above 20. Meanwhile, Canada’s stock valuations are near their long-term average, but there the offset of higher cyclical risks looms.
Sentiment has become noticeably oversold. We could potentially get to a panic threshold if the selloff continues. But we’re not there yet.
Right now, our view is that markets haven’t shifted enough for investors to consider making changes to their portfolios.
Disclosures
These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.
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