Author: Owen Murphy, Graphics: Nathan Nyaung
Trump’s new tariff policy aims to boost U.S. industries but may raise consumer costs, induce stock market volatility, and create long-term economic concerns.
The recent tariff policy changes will both positively and negatively affect different stock market sectors, creating economic uncertainty and negatively influencing domestic corporate earnings. The economic policies introduced by President Trump are likely to negatively impact global trade, raise inflation, and reduce GDP growth in the short term, although the long-term effects may hold potential.
What Are Tariffs, and How Do They Impact the Stock Market?
Tariffs are taxes a government collects on imported goods, typically used to protect domestic companies, generate GDP growth, or for potential political advantages through negotiation tactics. While tariffs can benefit local businesses by making foreign goods (typically cheaper than domestic products) more expensive, they also incentivize foreign businesses to migrate to the country that enforced the tariff to avoid the tax altogether. The other option for these companies is to stay in their country of origin and raise their prices to keep the same profit margins they had before the tariff, leaving the consumers to bear the burden.
In connection with the stock market, tariffs introduce uncertainty worldwide and can create volatility from mass uncertainty, shifting markets at heavy volumes in short periods and sparking concern among investors regarding the stability of their investments in the long run. Tariffs can reduce foreign economic growth (Canada, Mexico, China), increasing inflation and profit margins for corporations. For example, JP Morgan predicts that the new tariffs could raise both U.S. GDP growth and inflation rates by 0.5–1%. An increase in inflation and a pullback in stock market growth often create challenging decisions for investors due to the uncertainty in the short-term market. Many investors rely on the company’s quarterly earnings calls to ensure that taxes will not affect the company’s profits and overall future.
Recent Tariff Policies Enforced by President Trump
Before Trump’s second presidency, the U.S. tariff policy focused on reducing trade taxes. According to the World Bank, the weighted mean applied tariff rate for all products in the U.S. was approximately 1.6% in 2016. On Liberation Day, April 2nd, Trump imposed a 10% tariff on all countries and higher tariffs on 57 other nations. More than 75 countries have already reached out to the U.S. to discuss new trade deals. As a result, there is now a 90-day tariff pause for all tariffs, except for China, which retaliated by imposing a 125% tariff on all U.S. goods. China now faces a 245% tariff on imports to the United States because of its response to the initial 25% tariffs.
How Will the Tariffs Affect Different Sectors of the Stock Market?
What have we seen so far? On April 2nd, when Trump announced the new tariff regulations, the U.S. Stock market dipped over 10% across two days. The market has shown a slight recovery and has not exhibited the same level of volatility since the 2008 crash. This recent downturn has made investors highly concerned about potential new regulations that could be introduced at any moment. On April 9th, when Trump announced the 90-day pause, the market began its recovery, showing more signs of hope that the trade war had started to die out. Nevertheless, China has remained firm, leading to a back-and-forth increase in tariffs from both sides.
The stock market holds sectors that influence different labor markets internationally. Some sectors that will be negatively impacted will be manufacturing & automotive, retail & consumer goods, and energy. Most foreign countries export goods such as automobiles, electronics, and utilities to the U.S. Canada is vital in exporting energy to the U.S., which will now experience increased costs that impact oil and gas. For instance, Ford Motor Company (F) relies heavily on importing car parts from Ontario, Canada, similar to other car manufacturers. Foreign companies, therefore, will encounter similar challenges that will negatively impact their profitability because of the 25% tax on Canadian goods imported into the U.S.
Other sectors that will likely benefit from the changes will be domestic manufacturers, defense, and infrastructure. U.S. companies that don’t rely heavily on imports could have an edge in their market because they can produce more of their goods at a lower cost than foreign businesses. Also, increased government spending on U.S. production may provide a benefit to the U.S. defense sector, as there will be an expected increase in the GDP. For instance, Lockheed Martin (LMT) is the largest global defense contractor in the United States. From the recent policy changes, they will most likely benefit from the increase in U.S. government spending on defense that is influenced by the new tariffs.
The S&P 500, a stock market index containing the 500 largest companies, will also be affected because it covers every sector across the stock market. Goldman Sachs estimates that if these tariffs remain in place, they will reduce S&P 500 earnings per share (EPS) by approximately 2-3%, reinforcing concerns over corporate profitability.
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What Does This Mean for the Future of the Stock Market?
In the short run, market volatility is predicted to increase as investors are unsure of the near future. With the unpredictable market shifts, we will see a major correction if there is any sort of pressure on earnings calls for these larger corporations.
Longer-term effects will depend on whether these tariffs remain in place or if deals will be made with the countries affected. If the tariffs are here to stay, there will be an increase in domestic production and higher costs to consumers because companies will increase their prices to keep their profit margins. However, JP Morgan anticipates continued U.S. dollar strength relative to major trading partners for the foreseeable future. The recent shift may hurt U.S. exports by making the products more expensive in foreign countries. Investors should not worry about the current downturn in the market because the economy will always recover in the long term.
Take-Home Points
- Tariffs are taxes on imported goods that can protect domestic industries but also raise costs for consumers and foreign businesses.
- Stock market volatility increases as investors react to uncertainty regarding how tariffs impact economic growth.
- Sectors like manufacturing, retail, and energy will likely experience economic decline, while domestic manufacturers and the defense industry will likely increase.
- Trump’s new tariffs will impact trade by over $380 billion, potentially increasing U.S. GDP growth and inflation.
- Investors need not be concerned about the current market downturn, as the economy will inevitably recover over time.