\n One has to only recall the unique causes of the most notable corrections\n of the past 25 years: The global pandemic in 2020, the global financial\n crisis and U.S. housing crisis in 2008\u20132009, and the bursting of the U.S.\n technology bubble in 2000\u20132001. The catalysts were rather dissimilar.\n <\/p>\n
\n And there have been many other corrections in between and before these\n episodes, each with their own particular contours.\n <\/p>\n
\n \n The nature of stock market corrections reminds us of the old expression,\n \u201cIt\u2019s never happened before and here it is again.\u201d\n <\/strong>\n <\/p>\n \n The column chart shows S&P 500 full-year returns from 1980 to 2024 and\n the year-to-date return for 2025 through April 4. Through 2024, there\n are 35 positive years of the 45 total years. The worst period was the\n three years of consecutive declines in 2000, 2001, and 2002. There\n were no other sequential decline years. The chart also shows the\n maximum drawdown periods in each year. The S&P 500 declined by 15\n percent or more peak to trough during 16 of the 45 years through 2024.\n In nine of those years it declined by 20 percent or more peak to\n trough.\n <\/p>\n \n Source – RBC Wealth Management, Bloomberg; data through 4\/4\/25\n <\/p>\n <\/div>\n <\/div>\n \n \n Following the significant tariffs announced in the White House Rose Garden\n on April 2, RBC Economics estimates that the effective U.S. tariff rate\n surged from 2.4 percent in 2024 all the way up to 24 percent.\n <\/p>\n \n \n If this elevated level stays in place, this would be the highest\n effective tariff rate since 1906, according to The Budget Lab at Yale\n University.\n <\/strong>\n <\/p>\n If this isn\u2019t a paradigm shift, then what is?<\/p>\n \n Even if the effective tariff rate retreats following any forthcoming\n negotiated trade deals\u2014a likelihood, in our view\u2014we think the genie is out\n of the bottle. President Donald Trump\u2019s trade policies further change the\n nature of geo-economic and geopolitical relations. In fact, we believe the\n seeds of deglobalization and trade fragmentation along the shift toward a\n multipolar world were sown years ago, which we outlined in this\n \n The line chart shows the U.S. average effective tariff rate from 1790\n to 2024 and RBC Economics\u2019 estimate of the effective tariff rate in\n 2025 following the tariff announcements on April 2, 2025. The average\n effective rate was very high during the early years of the country,\n peaking at 57% in 1830. It then fell significantly, reaching 14% in\n 1861, before spiking to almost 47% in 1869. The tariff rate followed a\n downward path from that point through 2024, although it reached almost\n 20% in 1933. It fell to very low levels and was at 2.4% in 2024.\n However, given the recent tariff announcements, RBC Economics\n estimates the average effective tariff rate has jumped up to 24%.\n <\/p>\n \n 24% is the estimated effective tariff rate following the reciprocal\n tariff announcements on 4\/2\/25. RBC estimate subject to change if\n tariff levels change.\n <\/p>\n \n Source – The Budget Lab at Yale University (historical data through\n 2024), RBC Economics estimate as of 4\/3\/25\n <\/p>\n <\/div>\n <\/div>\n \n \n Paradigm shift or not, we think there is wiggle room for near-term U.S.\n tariff policy.\n <\/strong>\n <\/p>\n \n Kevin Hassett, director of the White House National Economic Council, said\n that more than 50 countries have already reached out to negotiate tariff\n levels. Reports from Bloomberg indicate this includes Japan, Indonesia,\n and Vietnam. Taiwan is attempting to strike a deal as well. At some point,\n we believe negotiations between the U.S. and EU will commence.\n <\/p>\n Also, domestic U.S. political risks can\u2019t be ignored, in our view.<\/p>\n \n \n We\u2019d be surprised if Trump didn\u2019t adjust his tariff policies in the\n coming weeks or months, including by at least telegraphing some progress\n on tentative trade deals<\/strong\n >\u2014especially if political pressure builds and inflation and overall\n economic data continue to deteriorate.\n <\/p>\n \n RBC Economics Senior U.S. Economist Mike Reid estimates that tariffs near\n the existing effective rate of 24 percent could cause the Core Consumer\n Price Index (consumer inflation excluding food and energy) to jump from\n 3.1 percent in February to roughly 3.8 percent by July, before easing to\n about 2.7 percent by late 2026.\n <\/p>\n \n This would come on top of an overall rise in consumer prices of roughly\n 24 percent since right before the pandemic, according to official\n statistics. Anecdotal evidence suggests prices for a lot of goods and\n services have risen more.\n <\/p>\n \n Another inflation wave could potentially impact the November 2026 midterm\n congressional elections, as conservative Republican Senator Ted Cruz\n strongly warned over the weekend. Polls indicate inflation continues to be\n among American voters\u2019 top concerns.\n <\/p>\n \n \n One of the biggest unknowns for equity markets is how tariffs will impact\n corporate profits in the near and medium term. This is important because\n profit growth is the mother\u2019s milk of stock markets.\n <\/p>\n \n What we have now is an abundance of uncertainty about profits. Regional\n Federal Reserve surveys indicate that many companies of all sizes are\n having difficulty gauging the impact of tariffs on supply chains and\n future demand, and they are having a hard time making capital spending\n decisions given the economic uncertainties.\n <\/p>\n \n The Q1 earnings reporting season, which begins in earnest this week, might\n add a little clarity, but we think earnings uncertainty will linger for\n months due to tariff and related supply chain risks.\n <\/p>\n \n \n RBC Capital Markets Head of U.S. Equity Strategy Lori Calvasina has\n lowered her 2025 S&P 500 earnings per share forecast twice in the\n past three weeks.\n <\/strong>\n <\/p>\n \n Calvasina\u2019s forecast stood at $271 per share at the beginning of the year,\n and came down to $264 per share on March 17 as Q1 economic data wobbled\n and tariff risks started to rise, and was reduced again to $258 per share\n on April 4, soon after the Rose Garden tariff announcements.\n <\/p>\n \n If the $258 per share forecast pans out, this would represent S&P 500\n profit growth of about 4.5 percent from the 2024 level\u2014below average\n although not bad given the circumstances.\n <\/p>\n \n \n But if a recession were to materialize, there\u2019s little doubt in our\n minds that there would be downside risk to Calvasina\u2019s $258 per share\n forecast.\n <\/strong>\n <\/p>\n \n When recessions occur, profits usually decline rather than increase. And\n equity market corrections during recessions tend to be deeper and the path\n back to the previous high tends to take longer to traverse.\n <\/p>\n \n Thus far, RBC\u2019s economists are not forecasting a recession, but they\n acknowledge the risks have risen. And while our proprietary recession\n indicators have been warning of elevated recession risks for a while, not\n all of them are flashing red right now.\n <\/p>\n \n In tandem with the latest earnings revision, Calvasina has also lowered\n her 2025 year-end S&P 500 price target to 5,550 and noted that the\n situation had morphed from a \u201cgarden variety\u201d correction to a \u201cgrowth\n scare,\u201d which is typically more forceful. Growth scares occur when\n recession fears rise and begin to be priced into the market\u2014but a\n recession doesn\u2019t actually pan out when all is said and done.\n <\/p>\n \n Although the 5,550 year-end S&P 500 price target is higher than the\n market\u2019s 5,074 level as of the April 4 close and where the market is\n trading as of this writing, it would represent a slight decline for the\n year.\n <\/p>\n \n Both Calvasina\u2019s price target and earnings forecast assume U.S. real GDP\n growth in the 0.1 percent to 1.0 percent range for 2025\u2014a level we often\n refer to as \u201cstall speed.\u201d Such tepid growth, coupled with RBC Economics\u2019\n forecast of higher inflation due to tariffs, would represent a mild\n stagflationary economic environment.\n <\/p>\n \n \n \n It\u2019s currently difficult to gauge the sector and industry implications\n of tariffs because of the interplay between tariffs and the economy, and\n domestic recession risks.\n <\/strong>\n <\/p>\n \n Let\u2019s take the Financials sector, for example. These are services\n companies and thus far the tariffs are on goods, not services. But if\n tariffs cause a U.S. recession or unforeseen risks arise within the global\n financial system, Financials stocks would likely be negatively impacted.\n However, if the U.S. and global economies can sidestep a recession, then\n we think there ultimately could be a buying opportunity in Financials.\n <\/p>\n \n Similar assessments can be made for industries and companies that are\n mainly domestically oriented and not highly dependent on foreign supply\n chains. The state of the U.S. economy will largely determine the fate of\n their corporate profits in coming quarters.\n <\/p>\n \n \n \n More broadly, we continue to recommend tilting equity exposure toward\n \u201chigh-quality\u201d stocks, particularly dividend growers.\n <\/strong>\n <\/p>\n \n \u201cHigh-quality\u201d stocks represent companies that have strong balance sheets,\n good cash flows, and financial flexibility, so that if they need to cut\n expenses, they can. These are companies with competent management teams\n who have experience at the helm during different phases of the economic\n cycle\u2014both in good times and uncertain or challenging times.\n <\/p>\n \n Within this category, we favour dividend growth stocks\u2014companies that have\n the financial wherewithal to raise their dividends year in and year out,\n regardless of the state of the economy.\n <\/p>\n \n \n The chart shows annual total returns for the S&P 500 and S&P Dividend\n Aristocrats Index (which consists of dividend growth stocks). Dividend\n Aristocrats outperformed the S&P 500 in down years and in some years\n of moderate returns. While the S&P 500 outperformed in a number of the\n positive years, the outperformance was typically small, except for\n 2023 and 2024.\n <\/p>\n \n
Pullbacks and corrections are normal<\/h3>\n
S&P 500 performance and maximum drawdowns by year<\/h4>\n
![\"S&P](\"https:\/\/www.rbcwealthmanagement.com\/assets\/wp-content\/uploads\/global\/shock-and-tariff-en-chart-1.png\"\n)
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Is this a global paradigm shift?<\/h2>\n
Paradigm shift: Highest tariff level since 1906<\/h3>\n
U.S. average effective tariff rate since 1790 and current estimate<\/h4>\n
![\"U.S.](\"https:\/\/www.rbcwealthmanagement.com\/assets\/wp-content\/uploads\/global\/shock-and-tariff-en-chart-2.png\"\n)
\n \n Clearly the profit outlook is murky. How should investors be thinking\n about this?\n <\/h2>\n
\n Are there areas of the U.S. equity market that can at least hold up better\n against the headwinds?\n <\/h2>\n
Tilt toward high quality, and dividend growers in particular<\/h3>\n
Annual total returns since 2000<\/h4>\n
![\"Annual](\"https:\/\/www.rbcwealthmanagement.com\/assets\/wp-content\/uploads\/global\/shock-and-tariff-en-chart-3.png\"\n)
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