Trump's Tariffs Conceal an Unseen Risk, Potentially Harming Stock Markets Severely
The first week of April 2025 saw a significant shake-up in the stock market, with the S&P 500 experiencing its fifth-steepest two-day percentage drop in 75 years, losing 10.5% of its value. This volatility was triggered by President Donald Trump's unveiling of his tariff and trade policy, marking the beginning of a sustained headwind for many public companies.
On April 9, 2025, Trump placed a 90-day pause on reciprocal tariffs for all countries except China. However, this temporary relief was not enough to alleviate the long-term concerns surrounding the tariffs' impact on the US economy and stock market.
A study by four New York Federal Reserve economists found that the introduction of tariffs removed some aspects of transparency and predictability valued by Wall Street. The tariffs on steel, aluminum, and copper (with copper tariffs set to go into effect on Aug. 1) could reignite the prevailing rate of inflation, weaken corporate earnings, and potentially send stocks notably lower.
The study also revealed that companies with exposure to Trump's tariffs had worse future real outcomes from 2019 to 2021, with declines in labor productivity, employment, sales, and profits. Public companies exposed to Trump's tariffs performed notably worse on tariff announcement days than businesses with no exposure.
The long-term impacts of these tariffs are largely negative for the US economy and stock market. Higher production costs and inflation are evident, with an average household cost increase of about $2,400. Reduced competitiveness and slower growth have been observed, with a marked slowdown in private business investment and consumer spending growth after tariff implementation.
The tariffs have also negatively impacted corporate performance and stock market performance. Studies show that companies exposed to tariffs underperformed on tariff announcement days and had declines in employment, sales, profits, and productivity in following years.
Strained trade relationships are another key effect of Trump's tariff policies. These policies damage long-term trust with allies and complicate trade negotiations, limiting opportunities for beneficial trade deals. Expanding tariffs on steel/aluminum imports and related products further tightens trade relationships and raises input costs.
Public perception and economic expectations also play a role. A majority of Americans view the tariffs’ long-term effects as mostly negative for the country and themselves, with Democrats overwhelmingly negative and Republicans divided.
Despite some optimism around trade deal progress and AI-driven productivity gains, these are unlikely to fully offset tariff-related headwinds. The historic volatility in 2025 also thrust the Nasdaq Composite into a bear market for the first time since 2022.
Following an extension via executive order from President Trump on July 7, this 90-day pause on reciprocal tariffs will end on Aug. 1. The potential upside is limited by external factors, and the hidden danger lurking within Trump's tariff and trade policy threatens to sink the stock market, posing risks of slower long-term economic growth and weaker investor confidence.
- In light of the anticipated end of the temporary pause on reciprocal tariffs on August 1, investors may want to reconsider their investment strategies in the finance sector, particularly in stocks that have exposure to these tariffs.
- The prolonged uncertainty and unpredictability created by President Trump's tariff and trade policy have had a detrimental impact on the stock market, causing volatility and potential losses in the finance industry.
- Beyond the stock market, the tariffs have negatively influenced various sectors of the US economy, including private business investment, consumer spending, labor productivity, employment, sales, and profits, complicating financial planning and decision-making.
