President Trump announced that he’s proceeding with tariffs on three of America’s largest trading partners: Canada, Mexico and China. While Trump has touted the tariffs as a way to reduce the trade deficit with other countries, it will act like a sales tax for ordinary Americans, who will end up paying more for the same foreign or American-equivalent products. The tariffs will have broad-ranging effects on the stock and bond markets, with a variety of impacts.
Here are some key impacts to the markets from Trump’s tariffs and why investors are right to worry.
Trump tariffs: Here’s what’s been announced
After invoking emergency economic powers, President Trump announced that the U.S. is implementing a series of mostly across-the-board tariffs:
- A 25 percent additional tariff on imports from Canada, with the exception of energy, where the tariff will be 10 percent.
- A 25 percent additional tariff on imports from Mexico.
- A 10 percent additional tariff on imports from China.
Tariffs act much like a sales tax, say economists, so that Americans end up paying higher prices if they want to continue purchasing imported goods from countries subject to the tariff. The U.S. government collects the tariff as tax revenue. But American-made goods also see price increases, because domestic producers can raise prices while still underpricing imported goods.
The initial impact to Americans should be higher prices — inflation — as companies pass on any higher costs, if they’re able to do so.
“All else being equal, the imposition of tariffs would produce a one-time bump in prices of affected products, but the reality may prove much different,” says Greg McBride, CFA, Bankrate chief financial analyst. He points to other factors — for example, substitution effects, retaliation by the targeted countries and reduced demand — that could affect how the tariffs actually play out in practice.
Unlike tariffs in Trump’s first term, which were smaller overall and aimed at select industries such as steel and aluminum, this round of tariffs is broad. New tariffs hit critical energy imports from Mexico and Canada, the latter of which is the biggest source of America’s foreign oil.
Some of the finer details remain unclear, such as how long the tariffs will be implemented. But longer tariffs would impose higher costs on U.S. consumers, reducing overall economic growth.
America’s trade partners have already threatened retaliatory tariffs of their own, heating up a trade war. That could put further pressure on U.S. exports and hurt the American economy.
How will the Trump tariffs affect markets?
As soon as it was possible, the U.S. stock market began selling off in anticipation of the tariffs’ economic effects. While U.S. tariffs and potential retaliatory tariffs will hurt each economy, the pain won’t be spread out evenly among countries or industries.
For example, the Peterson Institute estimates the impact of the tariffs will be a loss of real GDP in the U.S. of 0.2 percent, 1 percent in Canada and 0.7 percent in Mexico over the next two years if there’s no retaliation. In contrast, the Bank of Canada estimates the impacts will be more severe over a 10-year period, with the U.S. losing 1.1 percent of real GDP, Canada losing 3.1 percent and Mexico a loss of 2.8 percent if America’s trading partners retaliate.
Markets are selling off on investors’ diminished expectations of future growth but also on higher uncertainty about the future course of policy and how it affects companies.
“Markets hate uncertainty and this introduces a lot of new questions and unknowns,” says McBride. “The most impactful to markets is whether or not these tariffs prove to be short-lived or if this is a policy that is more sustained. Anything that impacts demand and profits will certainly hit stock prices.”
Of course, tariffs may not impact some domestic producers much in the short term, and for companies that source goods only from the U.S., the tariffs’ effects may be modest at first. But many American companies — especially large publicly traded companies — have extensive supply chains that source goods from Mexico and Canada or produce there for export to the U.S.
In fact, some automakers may ship products back and forth across the border multiple times over the course of production, incurring the tariffs over and over again.
So large companies that have well-developed supply chains — the kind of companies that dominate stock exchanges — will feel some effects from the tariffs. And with tariffs on oil, the price of oil will rise as well, meaning higher prices on gasoline and other fuels.
Of course, if Canada, Mexico and China retaliate with tariffs of their own, American companies that export to these places would also feel the effects, ultimately hurting American employment.
But those are just some of the first-order effects of the policy. If tariffs are maintained long enough, the slowdown in growth spills over to other industries not immediately impacted by them. More of consumers’ money is absorbed by tariffs, so there’s less to buy other goods.
And that effect happens across borders, too. Investment bank J.P. Morgan estimates that the current tariffs, if sustained for six months, will be enough “to throw the Mexican and Canadian economies into recession.” That also means less Canadian and Mexican money buying American-made goods, too.
Is there any company that benefits from the tariffs? Well, the best-positioned companies are those that can pass on price increases to their customers, regardless of the economy. But even these firms eventually feel the effects of a long trade war that severely dents economic growth. They’re likely to end up with customers who aren’t able to spend as much they otherwise could.
How will tariffs affect interest rates?
One of the big questions for investors is how these wide-ranging tariffs will affect interest rates. Interest rates are at the heart of how investors value stocks and bonds, and both stocks and bonds look like more attractive alternatives when interest rates are low or falling.
Normally, rising inflation will lead the Federal Reserve to boost interest rates, cooling inflation that is too hot. The Fed just spent more than two years fighting inflation spurred on by the seize-up of supply chains from the COVID-19 pandemic. Now with tariffs threatening to raise inflation, at least in the short term, will the U.S. experience enough inflation that the Fed needs to raise rates again?
Investors already expected the Fed to lower interest rates two or three times this year, though the Fed held steady on rates at its January 2025 meeting. The potential for lower rates helped boost investors’ enthusiasm for stocks and helped bolster bond prices, too. Now if the Fed has to raise rates to combat inflation instead of lowering them, it could cause markets to whipsaw.
For example, with higher short-term rates, banks may suddenly become less attractive. Banks make money on the spread between short-term rates and long-term rates, so a flatter yield curve means they’ll make less money.
But not so fast. If the tariffs on all sides are too swift and brutal, it may lead to a rapid decline in the U.S. economy, necessitating the Fed to cut rates. So rate cuts aren’t off the table, either.
“If the strength of the labor market is undermined, if demand takes a hit, those are the types of things that would get the Fed back to cutting rates sooner not later,” says McBride.
And with lower rates, suddenly stocks and bonds begin to look like more attractive options. But investors will need to weigh all the effects of uncertainty, profitability and more to figure out where stocks are going to go. But uncertainty alone keeps investors on the sidelines and away from risky assets, hurting stock prices.
With the S&P 500 index and the Nasdaq near all-time highs, uncertainty about the real economy and interest rates could be enough to significantly derail that upward momentum.
“Stock valuations are high, and you now have reason for investors to revisit their assumptions about demand, growth, and profits, all of which could undercut those valuations and bring on a very commonplace market correction,” says McBride. “Or, if these tariffs get repealed in a week, then we’re off to the races again.”
Bottom line
The future uncertainty is why long-term investors are well advised to tune out much of the noise, invest regularly through dollar-cost averaging and hang on tight. Those with no need to sell today can look at declines in major indexes as an opportunity to buy stocks at lower valuations, a move that should result in higher long-term returns.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
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