How Far Could Stocks Fall on Tariff Fears Before Trump Changes Course?

As President Trump's tariff threats continue to escalate, investors are grappling with the potential impacts on the stock market. With the Dow Jones Industrial Average (DJIA) plummeting over 670 points on Tuesday, March 6, 2025, and the S&P 500 Index (SPX) losing over 1.2%, investors are wondering how far stocks could fall before Trump changes course. To answer this question, we must examine the historical performance of the market during periods of uncertainty and geopolitical tension.



First, let's consider the historical market reactions to tariffs and trade wars. During Trump's first term, the S&P 500 fell by a cumulative total of 5% on days when the U.S. announced tariffs in 2018 and 2019, according to Goldman Sachs Research. It fell by slightly more, a total of 7%, on days when other countries announced retaliatory tariffs. This suggests that markets tend to react negatively to tariffs and trade wars.

Second, we must consider the potential impact of tariffs on corporate earnings. Every five-percentage-point increase in the U.S. tariff rate is estimated to reduce S&P 500 earnings per share by roughly 1-2%. If sustained, the U.S. tariffs that were recently considered would reduce Goldman Sachs Research's S&P 500 EPS forecasts by roughly 2-3%. This indicates that tariffs can have a significant impact on corporate earnings and, consequently, stock prices.

Third, investor sentiment and market psychology play a crucial role in driving stock prices during periods of uncertainty and geopolitical tension. The market's reaction to the tariffs, including the sell-off, volatility, and changes in investor confidence, demonstrates the significance of these factors in shaping market dynamics.



Given these factors, it's difficult to predict with certainty how far stocks could fall on tariff fears before Trump changes course. However, historical market reactions to tariffs and trade wars suggest that markets tend to react negatively to such policies. The current situation, with its potential impact on earnings and global markets, could lead to a significant market downturn or even a crash if the tariffs are sustained.

As an investor, it's essential to stay informed about the latest developments and maintain a balanced perspective. While the potential impacts of tariffs on the market are significant, it's crucial to remember that markets are complex and influenced by many factors. Past performance is not a guarantee of future results, and the market's reaction to tariffs could vary depending on various factors, such as the duration and severity of the trade war.

In conclusion, while it's challenging to predict how far stocks could fall on tariff fears before Trump changes course, investors should be aware of the potential impacts of tariffs on the market and maintain a balanced perspective. By staying informed and remaining vigilant, investors can make more informed decisions and better navigate the volatile market landscape.