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Last week, while much of the market was worried about the potential impact of AI disruptor DeepSeek’s entrance on the scene, investors and analysts were also debating whether Trump was bluffing with the new tariffs. Many hoped he was, but that hope didn’t pan out.
On Saturday, February 1, the U.S. president officially signed an order imposing 25% tariffs on goods from Canada (with energy tariffs capped at 10% to avoid undue pressure on oil prices), 25% on Mexico, and 10% on China. As a result, markets opened in the red on Monday.
The key question now is: what are the consequences?
From a macroeconomic perspective, these tariffs could slow U.S. economic growth by an estimated 1.2%, while inflation could spike by 0.7%. In turn, higher inflation would put pressure on the Federal Reserve to keep interest rates high, which could cap gains in the S&P 500, Nasdaq, and even cryptocurrencies.
It is worth noting that the world has already seen the impact of trade wars long before Trump. As far back as the 1930s, the Smoot-Hawley Act imposed record tariffs on Europe and Canada. Retaliatory tariffs. As a result, U.S. exports fell 40% in just two years, making the Great Depression even worse.
On the business side, in recent decades, companies — from auto parts makers to electronics firms — have moved production to Mexico to benefit from lower labor costs and tax advantages. Now, they face a difficult choice: absorb higher costs by exporting to the U.S. or move production back to the country.
Either option implies higher expenses, which could, and most likely will, negatively affect financial results. Overall, Goldman Sachs estimates that each five percentage point tariff increase could reduce S&P 500 earnings per share by 1% to 2%. Thus, with the recently announced measures, it would be 2% to 3%.
What’s the bottom line?
All eyes are now focused on whether the countries can reach an agreement before a full-blown trade war breaks out. If they fail, the repercussions will hit markets hard, and investors will dump riskier assets first, but if they do, it could boost optimism again, pushing the S&P 500 back to the path of new records.
