US Stock Futures Surge on Trump's Tariff Narrowing

US stock futures are surging today after reports that President Trump is considering narrowing the scope of his tariffs on imports from China, Canada, and Mexico. The news has sent a wave of optimism through the markets, with investors hoping that a reduction in tariffs could ease trade tensions and boost economic growth.

The Trump administration has been imposing a variety of new tariffs since the beginning of the year, including 25 percent tariffs on Canada and Mexico and 10 percent tariffs on China using the International Emergency Economic Powers Act (IEEPA) authority. These tariffs took effect on February 4, 2025, and have already led to retaliatory measures from China and Canada.

The implementation of these tariffs has caused financial markets to "whipsaw" amid tariff negotiations, with Goldman Sachs Research estimating that sustained taxes on exports similar to those proposed could cut S&P 500 Index earnings per share by 2-3%. This volatility is further exacerbated by the fact that the US tariffs that were recently considered—including a 25% tariff on imported goods from Mexico and Canada and an incremental 10% tariff on imports from China—would reduce Goldman Sachs Research’s S&P 500 EPS forecasts by roughly 2-3%.

Sectors likely to be most affected by this policy shift include those heavily reliant on global supply chains and international trade. For example, the automotive sector, which is significantly impacted by tariffs on steel and aluminum, as well as the electronics and industrial machinery sectors, which are targeted by the 10% tariff on Chinese imports, are expected to face increased costs and potential disruptions in supply chains. Additionally, the agriculture sector, which is a target of China's retaliatory tariffs, is likely to experience reduced exports and lower revenues.

The narrowing of tariffs could also drive up the value of the dollar, according to Goldman Sachs Research foreign exchange analysts. A stronger dollar could further weigh on the earnings of S&P 500 companies, which derive 28% of revenues outside the US. This could lead to a reduction in S&P 500 EPS by roughly 2% for every 10% increase in the value of the trade-weighted dollar.

In summary, the narrowing of tariffs by Trump is likely to increase short-term volatility in US stock futures, with sectors such as automotive, electronics, industrial machinery, and agriculture being most affected. The potential for retaliatory measures and the impact on the value of the dollar further exacerbate the uncertainty and volatility in the market.

Trump's decision to narrow tariffs, particularly the 10 percent tariffs on all imports from China and the 25 percent tariffs on Canada and Mexico, has several potential long-term economic implications. These implications can significantly influence the overall performance of the US stock market.

Firstly, the tariffs are estimated to reduce US GDP by 0.4 percent and hours worked by 309,000 full-time equivalent jobs, before accounting for foreign retaliation. This reduction in GDP and employment can have a negative impact on the stock market, as lower economic growth and job losses can lead to decreased consumer spending and business investment. As David Kostin, chief US equity strategist at Goldman Sachs Research, notes, "For the stock market, every five-percentage-point increase in the US tariff rate is estimated to reduce S&P 500 earnings per share by roughly 1-2%." This suggests that the tariffs could lead to a reduction in S&P 500 earnings per share by roughly 2-3%, which would negatively impact the stock market.

Secondly, the tariffs have already led to retaliatory measures from China, Canada, and the European Union. China, for example, has announced retaliation on about $13.9 billion worth of US exports at rates of 10 percent and 15 percent. This retaliation can further disrupt global supply chains and increase costs for US businesses, leading to a decrease in corporate profits and a potential decline in stock prices.

Thirdly, the tariffs could also potentially drive up the value of the dollar, according to Goldman Sachs Research foreign exchange analysts. A stronger dollar could further weigh on the earnings of S&P 500 companies, which derive 28% of revenues outside the US. This is because a stronger dollar makes US exports more expensive and imports cheaper, which can negatively impact US companies that rely on exports for a significant portion of their revenue.

Finally, the tariffs could create a further inflation issue for the US. As Nigel Green, CEO of the DeVere wealth management group, notes, "Trump’s tariff strategy might resonate with domestic audiences, but the global economy doesn’t operate in a vacuum. These policies risk triggering a trade war that would hurt everyone — especially the middle and working classes which Trump is claiming to protect." This inflation could lead to higher interest rates, which can negatively impact the stock market by making borrowing more expensive for businesses and consumers.

In conclusion, Trump's decision to narrow tariffs has several potential long-term economic implications that could negatively impact the overall performance of the US stock market. These implications include a reduction in GDP and employment, retaliatory measures from trade partners, a potential increase in the value of the dollar, and a further inflation issue for the US.