How Tariffs Could Impact Equity Markets: Building Scenarios
Key findings
- We lay out a framework that allows equity risk and portfolio managers to rapidly understand how industry-specific as well as broad-market shocks could reverberate through global equity portfolios.
- Sectors such as Europe capital goods and autos, Japan autos and Canada staples — all of which have high revenue exposure to the U.S. — may face higher tariff risk than other sectors.
- A factor lens reveals additional insights to help investors manage their portfolios: For instance, the cyclical nature of the U.S. auto industry may amplify losses in an environment of weakening demand.
President Trump's unveiling of his tariff package brought the reality of tariff risks center stage for investors. To help manage the uncertainty, this blog post shows how revenue-exposure data and a scenario-analysis framework enable equity investors to translate targeted industry assumptions into potential portfolio-level impacts. Our analysis shows that assessing these impacts through a factor lens can yield unexpected insights. For example, the U.S. automobile industry's 37% loss under our scenario was fueled by a 10% market decline and a 10% tariff-related industry drawdown — both driven by scenario assumptions. Style-factor exposures deepened the projected losses, however: A -13% contribution from beta reflects the sector's vulnerability to economic slowdowns due to its cyclical profile.
Which countries and sectors are most exposed?
We started by using MSCI Economic Exposure data to track corporate-revenue streams. For companies that make up the MSCI World index, we found that 8.4% of global ex-U.S. firms' revenues originate in the U.S., while 9.7% of U.S. firms' revenues come from foreign markets — directly exposing them to tariffs and counter-tariffs.[1] Currently, the countries with the highest absolute revenue exposure to the U.S. are Japan, Germany, Canada, the U.K. and China. The interactive chart below breaks out major individual countries and Europe by Global Industry Classification Standard (GICS®) industry groups.[2] For instance, Japanese autos — the country's second-largest industry by sales — derive 37% of their revenues from the U.S., while European pharmaceuticals rely on the U.S. for 45% of their revenues.
Revenue exposure by industry group
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An interactive bar chart titled "Revenue exposure by industry group" displays US and Non-US revenue exposure across various industry groups. The chart uses blue bars for US exposure and yellow bars for Non-US exposure, with revenue measured in billion USD. Industry groups include Automobiles & components, Capital goods, Banks, and more. Data is based on MSCI Economic Exposure as of February 28, 2025, covering large- and mid-sized companies by GICS industry groups.
Data as of Feb. 28, 2025. Revenues as per MSCI Economic Exposure data. Countries represent MSCI Standard Country Indexes, which includes large- and mid-sized companies. Exposures shown by GICS industry groups.
Building a granular scenario based on revenue exposure
To construct our tariff scenario, we selected the goods industries with the largest U.S. revenue exposure in Japan, Canada and Europe, as well as selected key U.S. sectors. We then used each industry factor's maximum drawdown between the U.S. elections and April 3, 2025, as the basis for industry shock assumptions in our scenario, as illustrated in the chart below. Last, we applied shocks to the broad U.S. (-10%), Canada (-15%) and China (-5%) equity markets, alongside a 5% depreciation of the U.S. dollar against the euro. Using the MSCI Multi-Asset Class Model, we propagated these shocks to a global equity portfolio using current factor correlations.[3]
Industry-factor shock assumptions versus maximum drawdown since US election
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The exhibit contains a bar chart titled "Industry factor shock assumptions versus maximum drawdown since US election." It compares maximum drawdown and scenario assumptions for various industries, including Canada staples, Canada materials, Europe automobiles and components, Europe machinery, Europe pharmaceuticals life sciences, Japan automobiles and parts, US automobiles and components, and US computer electronics. The maximum drawdown is based on MSCI Multi-Asset Class Model's factor returns between November 5, 2024, and April 3, 2025, informed by MSCI Economic Exposure data and historical data.
Maximum drawdown is based on the MSCI Multi-Asset Class Model's factor returns between Nov. 5, 2024, and April 3, 2025. The scenario is not a forecast but is designed to be a plausible hypothetical set of assumptions, informed by MSCI Economic Exposure data and historical data.
Impact on equity portfolios by country and sector
The table below shows the scenario impact by country and sector. The auto GICS industry group — directly affected by our assumptions — underperformed the broad market across countries. We also observed underperformance in several Canadian industries, as well as Germany's pharmaceutical, semiconductor and consumer-discretionary industries. Conversely, more defensive or domestically oriented industries such as utilities, telecommunications and equity real-estate investment trusts (REITs) generally outperformed their respective markets.
Select industry-by-country P&Ls (in USD)
The stress test is applied to the MSCI ACWI Index. The table shows results for select countries and GICS industry groups. Stress-test results as of April 3, 2025.
We next examined the factor profit-and-loss decomposition for U.S. autos, Canadian materials, Japanese semiconductors and semiconductor equipment and U.S. REITs to better understand the impact of stress-test propagation. For U.S. autos, style factors compounded losses beyond the market and industry impact. The industry's cyclical nature — with its positive exposure to the beta factor — could exacerbate losses in an environment of slowing demand. In our scenario, the beta factor alone declined by 5%. Meanwhile, U.S. REITs' negative beta exposure offset broader market-driven losses.
In the case of Canadian materials, industry factors contributed positively — despite our assumption that the Canadian materials factor declined by 15%. This is because the GICS industry group also had a 67% exposure to Canada's gold and precious-metals factor, an industry that could benefit from soaring gold prices. Finally, Japanese semiconductors experienced a sharp sell-off under our scenario, with losses across market, style and industry factors. The style impact was also driven by the sector's cyclical nature while the industry impact reflected its link to the U.S. computer-electronics industry, which was shocked in our scenario.
Market, industry and beta factors are largest contributors to P&L
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A bar chart titled "Market, industry and beta factors are largest contributors to P&L" shows P&L contribution percentages for US autos, US REITs, Canada materials, and Japan semis portfolios. The chart is color-coded by factor group: Market/country, Industry, Beta, Other style factors, and Currency. The P&L contributions range from -40% to 10%, with Market/country, Industry, and Beta being the largest contributors. Stress-test results are as of April 3, 2025.
Though tariff uncertainty will persist, combining revenue-exposure data with a flexible scenario framework enables equity investors to assess how industry shocks from tariffs could ripple through their global equity portfolios.
The authors thank Georgina Toronyi for her contributions to this blog post.
1 MSCI Economic Exposure data maps company revenues to different end markets. For more details, see MSCI Economic Exposure Data Methodology.2 GICS is the global industry-classification standard jointly developed by MSCI and S&P Global Market Intelligence.3 We base stress-test propagation on the short version of the MSCI Multi-Asset Class Model (MAC.S), which uses a two-year half-life for correlations. The correlations are as of April 3, 2025. Clients can download the BarraOne® stress test on the support site.
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