'An $800 billion tax increase': Tariffs have derailed the S&P 500 forecast of one of Wall Street's top bulls

• Deutsche Bank dialed back its expectation for the S&P 500 this year.
• Analysts at the bank warn that tariffs will slash US corporate earnings.
• A trade policy pivot is necessary to trigger a durable rally.

Deutsche Bank has slashed its ultra-bullish outlook as it assesses the potential damage to corporate earnings as a result of tariff policy.

Analysts now expect the S&P 500 to reach 6,150 by the end of the year. While that still suggests 12% upside from the benchmark index's levels, it's a considerable downgrade from Deutsche's previous target of 7,000.

Aggressive tariff hikes will hit American firms disproportionately, amounting to an "$800 billion tax increase," the bank said. It arrived at that figure by applying the new effective US tariff rate of roughly 25% on $3.25 trillion of total goods imported to the country last year.

"US corporates intermediate most goods imports, whether for consumption or as components for further processing, and we see them bearing the bulk of the tariff hit with few avenues for relief," a team led by chief strategist Binky Chadha wrote on Wednesday.

In other words, tariffs will eat into corporate profits, and Deutsche now projects S&P 500 earnings-per-share to reach $240 this year.

"This is -15% below our prior forecast and implies a -5% decline from 2024 earnings," Chadha and his team said. "The bottom-up analyst consensus is currently at $269 and at risk of continuing downgrades."

All told, that's not a good omen for stocks. Since earnings growth is the fuel for S&P 500 gains, the bank expects it will keep trading in a range between 4,600 and 5,600. Positive news on tariffs should help trigger sharp upside, Chadha wrote, but there's no sure-fire signal that trade tensions are yet easing.

Chadha suggested that a slump in presidential approval ratings could be the key to unwinding tariff policy, but that has yet to happen. A durable rally will occur if there's a credible positive development on trade, which could happen once President Donald Trump's rating hits the low-40s to 30s.

"The longer it takes to get a policy relent, the higher the chances of non-linearities kicking in, which are then harder to unwind, invoking the risk of prolonged downturns such as in 2008, 2000 and 1973," his team added.

Deutsche is also gearing up for a large tax package to be approved this year, alongside an extension to Trump's 2017 tax cuts. Though this could deliver a short-lived rally, the benefits from fiscal policy won't be enough to overcome the hit from tariffs.