U.S. stocks face a tenuous moment with the arrival of President Donald Trump's latest tariffs.
The benchmark S&P 500 is down about 5% from its February 19 all-time closing high as a series of weakening U.S. economic reports has raised concerns about growth. Tariffs are exacerbating the headache.
The duties on foreign imports are widely seen by analysts as likely to increase inflation and to cut into corporate profits. But over a month into Trump's second term, investors are still trying to weigh the extent to which the president is using tariffs to bargain with trading partners on other issues, or if they are likely to be lasting policies.
Trump has said proposed 25% tariffs on Mexican and Canadian goods will take effect on Tuesday, along with an extra 10% duty on Chinese imports. Stocks slid on Monday after the president said there was no chance for Mexico or Canada to avert the tariffs.
"Right now, the market still views tariffs as more of a negotiating tool and not as a long-term strategy," said Chuck Carlson, CEO of Horizon Investment Services. "And if that starts to change, I think that that will have negative implications for the stock market."
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%, "a dynamic the market would likely price in advance of the earnings impact coming through," the bank's equity strategists said in a note on Monday.
"We're kind of going into a brave new world here of tariffs on several countries, and it's just really hard to determine two things: the reaction of the U.S. consumer to tariffs, and the earnings and results of companies that will be affected by the tariffs," said Peter Tuz, president of Chase Investment Counsel.
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 impending 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 Friday was still trading at 21.7 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 on Monday registered its highest close since December 19.
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."
(Reporting by Lewis Krauskopf; Editing by Megan Davies and Jamie Freed)
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