Market Musings 4/15/25: What About Your Friends?
Fighting our allies will lead to a smaller U.S. economy…
With all this tariff news, you’d be forgiven if you hadn’t realized that Q1 earnings season had begun. The big banks are reporting right now, but soon we will all be reminded that 41% of revenue in S&P 500 companies comes from abroad. Let’s discuss some evidence that America feuding with its allies is already leading to less foreign buyers of our goods and services.
U.S. stocks were hitting all-time highs earlier this year on the assumption that American companies would keep raking in profits from abroad. The WSJ had an article yesterday that covered the struggles of American brands counting on revenue from Chinese consumers.
The article makes clear this trend predated the most recent tariff turmoil. However, the tariffs will surely make things worse.
While much has been made of America’s trade deficit in manufactured goods, the U.S. service sector enjoys a $293 billion trade surplus. As reported by CNN, the “US service sector enjoys a trade surplus with almost every trading partner around the globe”. According to data from the U.S. Commerce Department, America’s trade surplus in 2024 was up +5%, meaning it grew faster than the U.S. economy which grew real GDP a healthy +2.8% that same year.
Mark Zandi, chief economist for Moody’s Analytics, said that service sector businesses “are all industries that power American economic growth. They’re the US economy’s secret sauce.”
If the U.S. and China don’t come to an agreement soon, we could see further retaliation against the U.S. service businesses. Last week, China announced they would be cutting back on the number of U.S. films they allow to be shown in the country.
According to Variety, the China Film Administration said “The wrong action of the U.S. government to abuse tariffs on China will inevitably further reduce the domestic audience’s favorability towards American films”.
Now this is an oversimplification – but in my mind, I like to think of manufactured goods as “must have” goods. Services are often things consumers would “like to have”, but don’t absolutely need. If I’m building a machine, I may NEED a particular set of nuts and bolts.
But does anyone really NEED to see actor Jack Black scream “Chicken Jockey” in a crowded theater?!?!
The most immediate evidence of a pullback in foreign spending has shown up in tourism, which has fallen sharply in recent weeks.
As reported in the Financial Times, “The number of European travelers visiting the U.S. has fallen sharply as political and economic tension and fears of a hostile border…threaten the world’s most lucrative air routes.”
The most jarring stat from the article was that western European tourism was down (17%) in March, vs. last year.
The FT had 8 charts showing the decline by country of origin and EVERYONE, from the Norwegians to the Germans, is skipping America.
Even if we get a quick resolution to the China tariffs, there’s mounting evidence that the trade war has damaged the American “brand” in ways that could reverberate for years to come. Americans may have short memories, but the international community witnessed 77 million of our citizens willingly choose economic chaos at the ballot box last November.
For the sake of company earnings, we can only hope the rest of the world can forgive and forget.
-Accrued Interest