The prospect of tariffs on major US trading partners under a second Trump administration raises concerns for the stock market. Trump’s publicly stated intentions to impose a 25% tariff on goods from Mexico and Canada, along with a 10% tariff on Chinese goods, could significantly impact specific sectors. These three countries represent a substantial 43% of US imports.
Table Content:
Sector-Specific Vulnerability
Barclays Research estimates that disruptions to trade flows resulting from these protectionist policies could negatively affect S&P 500 earnings-per-share (EPS) growth, a key driver of recent market gains. Their analysis suggests a potential 1.7% reduction in EPS due to tariffs, with the possibility of a steeper decline (2.8%) if retaliatory measures from other countries escalate into a full-blown trade war.
Barclays Research chart showing potential impact of tariffs on S&P 500 sectors.
Barclays anticipates the consumer discretionary and materials sectors would be particularly vulnerable, potentially experiencing double-digit negative EPS impacts. This is due to their significant supply chain and production presence in both Mexico and Canada. Other sectors, including industrials, technology, and consumer staples, could also face moderate negative impacts.
Market Uncertainty and Historical Precedent
While the actual implementation of these tariffs remains uncertain, with Barclays suggesting they may serve as a negotiating tactic, the mere threat of tariffs can negatively impact market sentiment. Recent research from the New York Federal Reserve indicates that tariff announcements alone can hinder S&P 500 performance. Their analysis of the US-China trade war during Trump’s first term revealed a consistent pattern of declining S&P 500 returns following each tariff announcement.
New York Fed chart showing stock market reaction to tariff announcements.
According to Fed analysts, these declines likely reflect increased pessimism about future corporate profits and a reduced willingness among investors to hold risky assets.
Trade Uncertainty and Potential Negotiations
Goldman Sachs highlights the persistent trade uncertainty, regardless of whether the tariffs are enacted. They view the protectionist stance as an initial bargaining position leading into the 2026 renegotiation of the USMCA (United States-Mexico-Canada Agreement).
Beyond the targeted tariffs, Trump has also proposed a broader 10% tariff on all US imports. Prior to the election, Barclays estimated this could lead to a 3.2% reduction in S&P EPS in the following year.
Conclusion
The potential for renewed trade tensions under a second Trump administration introduces significant uncertainty for the stock market. While the ultimate impact depends on the actual implementation of these policies and potential retaliatory measures, investors should closely monitor developments and consider the potential sector-specific vulnerabilities highlighted by analysts. The historical precedent of market reactions to tariff announcements underscores the importance of incorporating trade policy uncertainty into investment strategies.
