Trump's New Tariffs: A Recipe for Stock Market Disaster or Just Another Bluff?

As President Donald Trump's administration announced sweeping tariffs on Canada, Mexico, and China, investors braced for the potential fallout. The question on everyone's mind: will these tariffs cause a stock market crash? History suggests that the answer could be a resounding yes.

Goldman Sachs analysts have modeled the impact of the tariffs and estimated that they could reduce the S&P 500's fair value by roughly 5%. According to their analysis, every 5pp increase in the U.S. tariff rate would reduce S&P 500 EPS by roughly 1-2%. If sustained, the tariffs announced this weekend would reduce their S&P 500 EPS forecasts by roughly 2-3% (Source: Goldman Sachs note, Feb. 3, 2025).



Bank of America analysts, on the other hand, estimated that a trade war between the U.S. and its largest trading partners could translate into an 8% hit to the S&P 500’s aggregate earnings (Source: Bank of America note, Feb. 3, 2025). This stark contrast in estimates highlights the uncertainty surrounding the potential impact of the tariffs.



Former JPMorgan strategist Marko Kolanovic warned that the index could retreat more than 1,000 points from its current level, which would put the index in a correction. "I think there's some probability of that," he said (Source: Bloomberg's Odd Lots podcast, Feb. 3, 2025). This warning underscores the potential severity of the market impact, should the tariffs be implemented and sustained.

However, history has shown that Trump's tariff threats may not always translate into action. In 2018, Trump threatened to impose tariffs on Mexico and Canada, but ultimately reached a deal with the two countries to avoid the tariffs. This raises the question: is Trump's latest tariff threat just another bluff, or a genuine attempt to reshape global trade dynamics?



Investors should remain vigilant and consider diversifying their portfolios to mitigate risks associated with the potential market impact of the tariffs. Short selling, hedging, and cash management strategies may also be employed to protect against potential losses. However, it is essential to remember that the effectiveness of these strategies will depend on the actual impact of the tariffs and the market's reaction to them.

In conclusion, President Donald Trump's new sweeping tariffs have the potential to cause a stock market crash, as history has shown. However, the ultimate impact will depend on the duration and magnitude of the tariffs, as well as the market's reaction to them. Investors should remain informed and adapt their strategies accordingly to navigate the volatile market landscape.