MW This veteran investor crunches the numbers and sees the risk of a full-blown bear market

By Steve Goldstein

David Kotok says S&P 500 earnings per share could see 30-cent impact from tariffs

For something that the pundit universe uniformly says doesn't matter - the Moody's downgrade of the U.S. debt rating - Monday kicks off with stocks and importantly bonds lower as well.

More on that in a bit.

America's deteriorating finances plays a role, but not a starring one, in a new forecast from David Kotok. Kotok co-founded and until this year was the chief investment officer for the $3.3 billion investment advisory firm Cumberland Advisors. An author or co-author of five books, he is known for his summertime retreat called "Camp Kotok," where various analysts, investors and economists gather in Maine.

Kotok, in his latest email to clients, walks through an estimate of just how much tariffs will take a bite out of corporate earnings. "These estimates below are mine alone. The only thing we know about them is they are wrong. But I think they are within a reasonable guessing range for a starting point," he says.

He says that over 12 months, S&P 500 earnings per share will be reduced by 30 cents from tariffs, which would take current estimates of $2.60 down to $2.30. "Of course, this figure assumes that there are no other protectionist policy changes. I derive that number from models that attempt to convert a tariff level to an equivalent corporate tax-rate change," says Kotok.

Granted, the Trump administration and Republican Congress are trying to cut corporate taxes. But even so, every percentage point reduction in the existing 21% rate boosts S&P 500 EPS by only 2 cents a share.

Kotok says in total - so not just the tariffs but also the economy slowing down - earnings would fall to between $200 and $220 per share. That would, at a price-to-earnings multiple of 20, take the S&P 500 down to 4,000 to 4,400 range. But rising Treasury yields - a feature of trading on Monday - could drag that multiple even lower, he says.

"So, the worst case for the S&P 500 Index looks to be under 4,000 for a bottom," he says. Granted, that's the worst case - a moderate case would be for the S&P 500 closer to 5,000, assuming a final tariff policy more in line with the originally expected 10% tariff level and with mild retaliation on America's services trade surplus, he says.

"Of course, a Trump pivot could change this trajectory. And a financial crisis that triggers Fed intervention could also change things," says Kotok.

The chart

A pretty rough start on tap - S&P 500 and Nasdaq 100 futures each are down more than 1% as gold futures surge. The yield on the 10-year Treasury rose 10 basis points.

   Key asset performance                                                Last       5d      1m      YTD      1y 
   S&P 500                                                              5958.38    5.27%   12.79%  1.30%    12.35% 
   Nasdaq Composite                                                     19,211.10  7.15%   17.96%  -0.52%   15.13% 
   10-year Treasury                                                     4.546      7.20    13.20   -3.00    9.60 
   Gold                                                                 3242.8     0.03%   -5.60%  22.87%   33.43% 
   Oil                                                                  61.5       -0.74%  -1.90%  -14.43%  -22.37% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

Moody's on Friday night became the last of the major agencies to reduce the U.S. credit rating.

Republicans advanced their tax cut bill out of a committee that had previously resisted it.

President Donald Trump said Walmart $(WMT)$ should "eat the tariffs" and Treasury Secretary Scott Bessent said he called Walmart CEO Doug McMillon.

Johnnie Walker maker Diageo $(DEO)$ said it's expecting an annual tariff hit of $150 million based on current policies.

President Joe Biden was diagnosed with an aggressive form of prostate cancer.

Best of the web

Chinese billionaire who made fortune in gold is now betting on copper.

Japanese prime minister says country's fiscal situation is worse than Greece's.

El-Erian says the era of U.S. exceptionalism is on pause.

The chart

This chart from the fund management company Incrementum shows global central bank purchases over the last 75 years. "For three years in a row, central banks increased their gold reserves by more than 1,000 [metric tons] each year, achieving a special kind of hat-trick," the firm says in its annual, "In Gold We Trust" report.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   TSLA    Tesla 
   NVDA    Nvidia 
   GME     GameStop 
   UNH     UnitedHealth 
   PLTR    Palantir Technologies 
   AAPL    Apple 
   SMCI    Super Micro Computer 
   AMD     Advanced Micro Devices 
   NVAX    Novavax 
   TSM     Taiwan Semiconductor Manufacturing Co. 

Random reads

These companies were named 'DEI' before the acronym became political.

A paddleboarder makes friends with a manatee.

A French town set a big record for Smurf aficionados.

-Steve Goldstein

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May 19, 2025 06:37 ET (10:37 GMT)

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