A version of this post first appeared on TKer.co

The prospect of higher tariffs and other unfriendly trade policies is bad news for everyone exposed.

By definition, tariffs raise costs, which is bad for inflation, productivity, economic activity, and corporate earnings. And what’s bad for corporate earnings is bad for the stock market.

Policies that facilitate global trade have enabled countries to focus on their strengths and trade with others that can produce certain goods and services more efficiently. It’s a basic economic concept called "comparative advantage," and it explains why international trade is a win-win.

"U.S. companies have clearly benefited from globalization," Societe Generale analysts wrote. "The S&P 500 (ex-Financials) has benefited on the cost front too, with its cost of goods sold as a % of sales having dropped by 700bps since China joined the WTO."

This chart from Societe Generale is striking. The cost of goods, as a percentage of sales, has been falling for years, helping explain why profit margins have been expanding.

Costs of goods sold have been falling as a percentage of S&P 500 sales. (Source: Societe Generale)

Some of this chart can be explained by technology companies, which boast relatively high margins, accounting for a larger share of the S&P.

But as the analysts observed, eight of 11 sectors experienced gross margin expansion since China joined the WTO.

Most sectors have benefited from globalization. (Source: Societe Generale)

This trend could be blunted or potentially reversed depending on how aggressive any new protectionist trade policies are. That’s assuming all other things are held constant.

It’s worth mentioning that Corporate America continues to be very good at figuring out how to maintain profitability and profit growth despite emerging challenges. So it's possible that many companies will find creative ways to navigate Washington's tariff roller coaster.

That said, it’s hard to see how new tariffs or any other policy that disincentivizes globalization wouldn’t eventually lead to higher cost inflation, lower economic activity, or some combination of both.

To that end, Q2 earnings season will be informative as Corporate America updates us on how the uncertain trade policy outlook is affecting business conditions.

There were several notable data points and macroeconomic developments since our last review:

🛍️ Consumer spending ticks lower. According to BEA data, personal consumption expenditures declined 0.1% month over month in May to an annual rate of $20.59 trillion.