The S&P/TSX Composite index could see an “immediate” drop of more than 10 per cent as a consequence of the nascent Canada–U.S. trade war, a Jefferies Financial Group analyst says, with an eventual decline “upwards of 20 per cent” possible “when the dust settles.”

In a note to investors published late Sunday, analyst John Aiken says the consequences of the tariffs, ordered by U.S. President Donald Trump which had been set to begin Tuesday, were “not effectively priced into equities,” with the TSX rising recently even as the Canadian dollar has dropped.

“Given the divergence between the CAD and the S&P TSX, the immediate impact could be a decline of upwards of 10 per cent as the S&P TSX catches up with the decline in the CAD,” Aiken wrote.

“The longer the tariffs are in place, the more damaging it will be to the Canadian economy.”

Modelling a “roughly 10 per cent decline in earnings projections and likely a couple of turns off the P/E [price-to-earnings ratio]” of the index, Aiken says Jefferies “would not be surprised to see an upwards of 20 per cent decline in the index.”

CIBC analyst Ian de Verteuil offers a similar assessment of the market's lack of anticipation of the trade war, though with a somewhat less dismal forecast of the impact.

"We do not believe equity investors have incorporated much risk of meaningful tariff action against Canada," de Verteuil said in a note on Sunday.

"If, as we expect, these tariffs remain in place for some period, we would not be surprised to see a five per cent correction in Canadian equities. Some of the effect on the economy might be mitigated by a weaker Canadian dollar."

That five per cent drop is expected "in the coming week," de Verteuil writes, "with the downside mitigated by the global nature of most of the companies in the index."

Some observers expect negotiations to result in tariffs having limited scope or duration, de Verteuil says, but he argues that "so far it appears the Trump administration sees limited upside in accepting Canadian concessions."

Jefferies' Aiken says Canadian banks “are anticipated to be hurt most by the tariffs," given that financial companies’ performance is tightly linked to the overall economy. Life insurance companies are “expected to fare better, even if it is because they have a greater proportion of their operations outside of Canada,” he writes. Pressure will likely be similarly lower for property and casualty insurers, Aiken says.

“Finally, the asset managers will likely face renewed challenges on inflows and domestic equity valuations, but this could be offset by CAD dollar translation benefits of U.S. equities held in their mandates.”