The U.S. stock market took a hit on Monday after President Donald Trump announced sweeping tariffs against the country’s three largest trading partners—Mexico, Canada, and China.
Trump’s new measures include a 25% tariff on goods from Canada and Mexico—except Canadian energy products, which will face a 10% levy—while all Chinese imports will be subject to an additional 10% tariff starting February 4. While some analysts see these tariffs as a negotiating tactic, others are warning of longer-term economic consequences.
Markets initially reacted sharply, with U.S. equities plunging in early trading. However, after a call between Trump and Mexican President Claudia Sheinbaum resulted in a one-month delay for tariffs against Mexico, stocks pared some of their losses. Just before the market closed, President Trump spoke with Canadian Prime Minister Justin Trudeau, leading to a similar 30-day delay on tariffs against Canada, which lifted stocks in after-hours trading. Still, the threat of tariffs on China looms large, leaving investors on edge.
Economic Fallout: Inflation and Growth at Risk
Wall Street strategists are assessing the risks associated with prolonged tariffs. J.P. Morgan’s Global Investment Strategy Team initially considered broad-based tariffs on Canada and Mexico unlikely, but they now see a substantial impact if the measures remain in place.
Key economic risks identified by J.P. Morgan analysts include:
- A potential 0.5%–1% reduction in U.S. GDP growth.
- A comparable 0.5%–1% increase in inflation.
- Increased market volatility as investors reassess corporate earnings expectations.
- A stronger U.S. dollar, which could dampen global trade dynamics.
Goldman Sachs analysts echoed these concerns, warning that the tariffs could squeeze corporate profit margins. Companies face two options: absorb higher costs, which would erode profits, or pass them onto consumers, which could hurt demand. Goldman estimates that for every 5-percentage-point increase in tariffs, S&P 500 earnings could decline by 1%–2%.
According to Capital Economics, the tariffs could add up to 0.7% to core inflation, which may prevent the Federal Reserve from cutting interest rates in the near future. “Any chance of more interest rate cuts this year just died,” noted Paul Ashworth, the firm’s chief North America economist.
Global Ripples: Trade Retaliation and Policy Uncertainty
The economic impact of Trump’s tariffs extends beyond U.S. borders. Canada has already announced a 25% counter-tariff on select American goods, including groceries and alcohol, while Mexico and China have vowed to retaliate. With global trade flows disrupted, multinational companies are bracing for higher costs and potential supply chain upheavals.
Bank of America analysts suggest that tariffs against China may become a long-term fixture, reflecting broader geopolitical tensions. “We view the tariffs against China as part of broader geopolitical conflicts between the two superpowers,” the firm stated in a research note, predicting that average tariff rates on Chinese goods could double over time.
UBS, however, expects the tariffs on Canada and Mexico to be short-lived, citing potential economic risks for the U.S. economy. “The Trump administration would not want to jeopardize U.S. economic growth or risk higher inflation by leaving the tariffs in place for a sustained period,” said Solita Marcelli, UBS’s chief investment officer for the Americas.
As the tariff battle unfolds, Wall Street is split between expectations of a prolonged trade war and hopes for a last-minute resolution. Meanwhile, consumers and businesses alike are bracing for higher prices, heightened market volatility, and an uncertain economic landscape.
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