The U.S. stock market is facing a reckoning with the arrival of President Donald Trump's latest tariffs.
With fresh declines on Tuesday, the benchmark S&P 500 (.SPX) is down more than 6% from its February 19 all-time closing high, and in negative territory for the year. The tech-heavy Nasdaq Composite (.IXIC) was last down over 10% from its mid December closing peak, on pace to show it has been in a correction for several months.
Tariffs are exacerbating the headache for investors already worried that a series of weakening U.S. economic reports is raising concerns about growth.
The arrival of the tariffs "brings with it uncertainty as far as the earnings of some companies as well as the overall direction of the U.S. economy," said Peter Tuz, president of Chase Investment Counsel.
"I think there was some hope that before they were implemented there would be deals struck with the affected parties and we wouldn’t see them."
The levies on foreign imports are widely seen by analysts as likely to increase inflation and to cut into corporate profits.
Tariffs could pose challenges for companies by complicating supply chains or driving costs higher, some of which would be expected to be passed onto consumers in the form of higher prices, investors have said.
Morgan Stanley estimates that 25% tariffs on Mexico and Canada and 10% tariffs on China through 2026 could collectively reduce earnings for the S&P 500 by 5% to 7%, the bank's equity strategists said in a note on Monday.
Nationwide Chief Economist Kathy Bostjancic said in a note that the tariffs could detract at least 1 percentage point from gross domestic product growth and raise inflation by 0.6 percentage points, if there are proportionate retaliatory tariffs by the targeted countries and the levies are maintained throughout 2025.
ECONOMIC HEADWINDS
Beyond the levies in focus on Tuesday, Trump recently also floated a reciprocal tariff on European goods.
With the implementation of tariffs, the multinational companies that are among the biggest weights in the S&P 500 "will pay the price because they will have their profit margins squeezed," said Michael O'Rourke, chief market strategist at JonesTrading.
Meanwhile, 41% of S&P 500 revenue comes from outside the United States, according to Apollo Global Management, suggesting a tariff-induced global slowdown stands to reverberate in the U.S. as well.
The start of the added tariffs comes as a number of recent U.S. economic releases have disappointed or weakened, including consumer confidence, business activity and retail sales.
A survey on Monday showed U.S. manufacturing was steady in February, but a measure of prices at the factory gate jumped to near a three-year high, and it was taking longer for materials to be delivered, suggesting that tariffs on imports could soon hamper production.
"If some of these tariffs stick... it would create some headwinds for the economy that the stock market probably would not like," said Scott Wren, senior global market strategist at the Wells Fargo Investment Institute.
While stock valuations have moderated somewhat with the latest pullback, the S&P 500 as of Monday was still trading at 21.3 times based on price-to-earnings estimates, well above its long-term average of 15.8, according to LSEG Datastream.
In a sign of investor worry, the Cboe Volatility index (.VIX) on Tuesday was at its highest level since late December.
Equities "are dealing with potential new headwinds," Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, said in a note on Monday.
"While investors, consumers and CEOs prefer predictability, a recent run of weak economic data and falling consumer confidence, alongside policy uncertainty, has caused many to revisit the growth outlook."
