MW Not just the taco trade - why stocks should be resilient to tariff news, says Morgan Stanley
By Steve Goldstein
The recently passed tax bill contains good news for bigger tech companies
New tariff headlines have investors in a foul mood, though the history doesn't support caution when the S&P 500 SPX is trading at record highs, which at 0.3% away, the index more or less is.
According to UBS, it takes on average 105 days for the S&P 500 to see a pullback of at least 5% when the index is at a record, and during that time stocks outperform T-bills. It's understandable to put your head under a pillow and go to the safety of cash, but historically, it's not the right play.
Mike Wilson, Morgan Stanley's chief stock-market strategist, offers another reason why investors have thrown caution to the wind. Yes, there is the idea that the announced tariff rates won't actually be implemented - the so-called taco trade.
Another reason is that - as discussed but not officially confirmed - the tariff rates on Mexico and Canada will not be as high as whatever is agreed, because of the exception for goods that are compliant with the U.S.-Mexico-Canada free-trade agreement. Goods that so far escape new tariff rates are those that are entirely made in one of the three countries that are in the USMCA or have undergone significant transformation.
Wilson and his team went industry by industry to chart tariff sensitivity to different regions, with dark blue representing 15% of the total global total. It shows U.S. goods-oriented industry groups have the greatest import exposure to China, followed by Mexico, Canada and the European Union.
"On this basis, the more material trade related risk for equity indices would be if tariff rates on China were to increase materially from here. China is significant not only because of the number of industries with tariff cost exposure, but also because of the market cap weighting of those industries, in aggregate," they said. The second-biggest risk would be if Mexican tariffs did not receive the USMCA exemption.
The greater concern from here might be the sectoral tariffs, and the possibility of tariffs on the semiconductor industry in particular. "Given that semis are a critical component for many U.S. supply chains, we think this is an important development to watch as we gain greater clarity on which Section 232 tariffs could be in scope for the administration," they said.
Besides tariffs, the strategists highlight that the rate of change on analyst earnings revisions has shifted dramatically - from -25% in April to +3% now. Financials XLF in particular have seen the most significant rebound in earnings per share revisions of any sector over the last month.
They also examined the impact on stocks from the passage of the One Big Beautiful Bill. Upfront research-and-development expensing will help steer the actual corporate tax rate down to 13% from 20%, and it may be a reason why the Magnificent Seven grouping has outperformed over the last few months, they say. The law's R&D change won't actually show up in reported earnings, because U.S. GAAP requires immediate expensing, but it will increase cash flows.
Companies with at least $10 billion in R&D deferred tax assets are Alphabet $(GOOGL)$, Amazon.com $(AMZN.UK)$, Meta Platforms $(META)$, Microsoft $(MSFT.UK)$, Apple $(AAPL)$, Intel $(INTC)$ and General Motors (GM), according to separate research from the investment bank.
The market
U.S. stock futures (ES00) (YM00) (NQ00) were pointing lower, while the 30-year Treasury yield BX:TMUBMUSD30Y was approaching 5%. Bitcoin (BTCUSD) and other cryptocurrencies surged.
Key asset performance Last 5d 1m YTD 1y S&P 500 6259.75 -0.31% 4.73% 6.43% 11.48% Nasdaq Composite 20,585.53 -0.08% 6.07% 6.60% 11.89% 10-year Treasury 4.427 4.20 -2.90 -14.90 19.00 Gold 3378.5 0.96% -0.75% 28.01% 39.19% Oil 69.21 1.90% -3.18% -3.70% -15.56% Data: MarketWatch. Treasury yields change expressed in basis points
The buzz
President Trump on Saturday threatened 30% tariffs on both the European Union and Mexico.
Elon Musk reportedly is continuing to have his companies cross-invest with each other, as The Wall Street Journal reported SpaceX is going to invest $2 billion in xAI, the artificial-intelligence company that has previously merged with the X social-media platform.
The preliminary report on the fatal Air India crash found the Boeing (BA) 787 fuel switches were cut off, raising the possibility that pilot error rather than plane malfunction was at fault.
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-Steve Goldstein
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July 14, 2025 06:57 ET (10:57 GMT)
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