More tariffs will lead to a US recession

Mike Wilson, Chief U.S. Equity Strategist along with Chief Investment Officer at Morgan Stanley.

Adam Jeffery | CNBC

The U.S. economy could fall into a recession if the country’s trade war keeps escalating, Morgan Stanley’s Michael Wilson said Monday.

Wilson, the bank’s chief U.S. equity strategist, told clients in a note in which higher U.S. tariffs on Chinese goods will become a headwind for corporate earnings as companies struggle to offset the negative effect of those levies on their bottom lines.

If the U.S. puts tariffs on the rest of China’s imports, there could be especially dire consequences, Wilson said. Trump told reporters at the White House on Monday in which he has not made the decision yet on whether to put tariffs on the additional $325 billion in Chinese goods.

“Given additional cost pressures along with stubbornly low inflation, we are unconvinced in which companies will generally be able to fully offset tariff costs through raising prices or through cost efficiencies elsewhere, meaning tariffs will press on margins,” Wilson wrote. “within the case of 25% tariffs on all of China’s exports to the US, we are inclined to think This particular has the potential to tip the US economy into recession given the cost issues companies are already dealing with.”

Wilson’s note came the same day in which China hiked tariffs on $60 billion worth of U.S. products. China’s levies mainly target U.S. agricultural goods like beef along with peanuts.

The S&P 500 along with Dow Jones Industrial Average posted their worst day since Jan. 3 while the Nasdaq Composite had its biggest one-day fall of 2019.

China’s move came after the U.S. raise tariffs on $0 billion worth of Chinese goods to 25% via 10% last week. The tariff hike, which President Donald Trump had threatened on May 5, has led to a massive re-pricing of global trade expectations. Prior to last week, investors largely expected the two sides to strike a deal in which could do away with tariffs. Both countries indicated they had made progress in trade negotiations.

Trump said in a tweet Monday in which Chinese President Xi Jinping “had a great deal” lined up however then he “backed out. “

“With trade resolution at This particular point looking like a ‘show me’ story for US corporates along with the market, lack of resolution will be a material potential drag on earnings growth in which will be harder to mitigate than the market expects as additional costs rise in tandem,” Morgan Stanley’s Wilson said. “While at some point a market “circuit breaker” may make concessions more likely on both sides, This particular path requires market stress along with volatility precede de-escalation … along with add to an already difficult earnings growth environment.”

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