Why the stock market hates tariffs and trade wars

The stock market has been throwing a temper tantrum, fueled by fear of President Donald Trump’s tariff policy and the specter of an escalating global trade war.

Americans may wonder why trade policy has made stock investors so skittish.

At a high level, investors are nervous that a prolonged trade war poses significant risks for corporate profits and the U.S. economy, according to investment analysts.

That’s not a foregone conclusion, however. The Trump administration could strike trade deals and blunt the overall impact, for example, experts said.

“But if that doesn’t happen, the market may still be a long way from the bottom,” Thomas Mathews, head of Asia-Pacific markets at Capital Economics, wrote in a note on Monday.

It was the worst two-day stretch for the U.S. stock benchmark since March 12, 2020 — in the early days of the Covid-19 pandemic — and the fourth worst since 1950, according to Callie Cox, chief market strategist at Ritholtz Wealth Management.

Stocks briefly entered “bear market” territory — meaning they’d fallen 20% from their recent peak — during trading on Monday before paring some of those losses.

The sell-off came after Trump announced a sweeping plan Wednesday to put a 10% baseline tariff on U.S. trading partners. He set significantly higher rates for nations including China and traditional allies like European Union members.

Their scope caught many investors off guard.

The announcement “was more significant than most expected, so we had a material sell-off” in the stock market, Chris Harvey, head of equity strategy at Wells Fargo Securities, wrote in an e-mail.

The stock market is a forward-looking barometer of investor sentiment — and tends to fall when investors sense collective danger.

The fear is that tariffs will dent growth for publicly listed companies and the broader U.S. economy. Wall Street has raised its odds for a U.S. recession.

China put a 34% tariff on U.S. products after Trump’s announcement of “reciprocal” tariffs last week, and vowed it would “fight to the end.” Canada put 25% tariffs on a range of U.S. goods, while the EU bloc is readying its own 25% retaliatory duties.

(The S&P 500 was up over 2% Tuesday morning on rising hopes for trade deals with China and South Korea.)

Retaliatory tariffs make U.S. goods sold abroad more expensive, hurting export-reliant businesses — perhaps leading to layoffs and lower consumer spending.

“We expect many — if not all — countries outside the U.S. to adopt retaliatory tariffs of their own,” the Wells Fargo Investment Institute wrote in a note Friday.

Wells Fargo expects “significantly lower” growth for the U.S. economy in 2025 due to “unexpectedly aggressive tariff increases.” It lowered its target for gross domestic product to 1% from 2.5% this year.

For now, the economy isn’t yet showing signs of dramatic weakening, said Joe Seydl, senior markets economist at J.P. Morgan Private Bank. If tariff policy proves to be long lasting rather than temporary, the shock would likely cause a “mild” U.S. recession, he said.

Economists also expect tariffs to raise U.S. inflation this year, at a time when it hasn’t yet fallen back to earth from pandemic-era highs.

“While tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent,” Federal Reserve Chair Jerome Powell said Friday.

The first Trump administration put tariffs on about $380 billion of imports, in 2018 and 2019, according to the Tax Foundation. Now, there are tariffs on more than $2.5 trillion of U.S. imports — or, about seven times more.

Another difference is the White House’s public stance toward tariffs and communication about it, analysts said.

During Trump’s first term, there was level of stock market volatility the administration didn’t find tolerable, Seydl said. Now, there appears to be less concern about stock gyrations — which is perhaps the most important factor in the stock sell-off, he said.

“The capital markets (especially equities) are sending a signal to the Administration that all is not well and the probability of recession, job losses, and a negative wealth effect are all increasing,” wrote Harvey of Wells Fargo.

“The Administration has been somewhat dismissive of these signals, creating a negative feedback loop,” Harvey wrote.

Uncertainty around the framework, goals, potential duration and the White House’s economic tolerance regarding tariffs makes it difficult for investors to assess market risk, he added.