The impact of US tariffs on the intrinsic value of the securities
FINANCE
Jakub De Vries
4/16/20252 min read
Intrinsic Value vs Security Price
Introduction
U.S. tariffs have become a central point of debate in economic and financial circles. Since the beginning of the year, the S&P 500 index has declined by approximately 10.3%, prompting concern among investors over the falling value of their portfolios. This article explores the impact of tariffs on investor sentiment and market performance, focusing on how such policy shifts influence the intrinsic value of securities.
Historically, the market price of an asset often diverges from its intrinsic value. While market prices can be driven by speculation, intrinsic value depends on various fundamental variables, many uncertain or hidden. In a world of asymmetric information, confident investors and policymakers are better positioned to interpret these variables, often achieving higher returns by leveraging their insights, especially in the context of U.S. monetary policy.
US tariffs and intrinsic values analysis
There is a widespread belief that investors tend to react more strongly to short-term events than to changes in the underlying value of a security. This can cause significant price fluctuations, even when company fundamentals remain relatively stable. Most firms listed on the S&P 500 and Dow Jones indexes are well-established businesses, similar to their fixed income instruments, often backed by strong brand loyalty and customer sentiment. An analysis of their cash flow statements reveals minimal change over this year. For companies with experienced management, adapting supply chains to external shocks such as tariffs may take only a few months.
The US government's reasoning behind tariffs.
The official rationale for implementing these tariffs is often framed as boosting domestic aggregate supply by incentivizing firms to return to the U.S. market and create more jobs. However, a less commonly discussed perspective from my analysis is that these measures may also reflect a strategic or predatory approach to weaken foreign competitors and reinforce the United States' position as a global trade leader.
Conclusion
While market reactions to tariffs often reflect heightened investor sentiment, the underlying fundamentals of many large-cap U.S. companies remain relatively stable. This disconnect between intrinsic value and market price highlights the influence of short-term speculation and interest in a quick gain and information asymmetry. Whether implemented for domestic economic stimulus or as part of a broader geopolitical strategy, tariffs have complex advantages and disadvantages beyond immediate price movements. Understanding these dynamics is highly complex and vital for investors seeking to make rational decisions in an increasingly politicized global market.