How Tariffs Could Impact Equity Markets: Building Scenarios

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

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

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)

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

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.