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Trading  | June 20, 2018

While US equity markets are indefatiguable (if you don’t look at the Dow), amid a record spike in earnings expectations – that will never go down again… ever – it appears, Daimler may have just become the first to break the narrative (as real world trade war impacts come home), lowering its earnings potential for the year, citing increased import tariffs for US vehicles into the Chinese market for fewer than expected SUV sales and higher than expected costs.

Full Statement from Daimler:

Today, due to current developments, Daimler AG has made a new assessment of the earnings potential for the year 2018.

From today’s perspective, the decisive factor is that, at Mercedes-Benz Cars, fewer than expected SUV sales and higher than expected costs – not completely passed on to the customers – must be assumed because of increased import tariffs for US vehicles into the Chinese market.

This effect cannot be fully compensated by the reallocation of vehicles to other markets. As another decisive factor, a negative effect on earnings is to be expected in the second half of the year in connection with the new certification process WLTP (Worldwide Harmonized Light Vehicles Test Procedure). Furthermore, earnings at Mercedes-Benz Vans are affected in connection with the recall of diesel vehicles. Additionally, earnings at Daimler Buses are negatively affected by the declining demand in Latin America.

As a result, Daimler has now the following expectations for EBIT (the operating result EBIT represents earnings before interest and taxes) in the year 2018:

  • Mercedes-Benz Cars: slightly below the previous year,

  • Mercedes-Benz Vans: significantly below the previous year’s level,

  • Daimler Buses: in the magnitude of the previous year and

  • Daimler Group: slightly below the previous year’s level.

And just like that the smoke and mirrors of unshakable EPS growth are blown away and smashed as the reality of escalating trade war rhetoric bubbles up to the real world with automakers the first to start cutting EPS expectations.

Here’s who else will be next as the CEOs and investors come to terms with the reality of trade wars.

Lastly, as a reminder,  the biggest risk is that neither the US, nor China, is so far willing to indicate of a potential “out” to this classical tit-for-tat escalation, which in turn means that the risk of an all-out trade war, one which expands beyond merely the US and China, is growing.

As a result of escalating trade war concerns, Barclays recently estimated the impact in the worst-case scenario of an all-out trade war for US companies across sectors and US trading partners.

In a nutshell, the bank calculated that an across-the-board tariff of 10% on all US imports and exports would lower 2018 EPS for S&P 500 companies by ~11% and, thus, completely offset the positive fiscal stimulus from tax reform.

Barclays concludes that although protectionism was one of the four arrows of “Trumponomics,” it did not materialize during the administration’s first year in office, when equity valuations reached an all-time high as sentiment improved with the market’s focus on the other three “progrowth” arrows – tax cuts, deregulation, and fiscal expansion. The risk here is that an unleashing of anti-trade policies and potential of a trade war could reverse the upward trend in valuations, which is already showing up in The Dow… but being ignored by Nasdaq…

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