What Trump’s Tariffs Mean for Markets... What Happened?
President Trump followed through on tariff threats over the weekend and imposed 25% import tariffs on Canada and Mexico and an additional 10% tariff on China. The tariffs will go into effect on Tuesday. Why Did It Happen? The administration believes each of these countries need to do more to halt the flow of illegal fentanyl into the United States and that, apparently, is the reason for these tariff increases. Additionally, the USMCA (the U.S./Mexico/Canada trade agreement that Trump negotiated in his first term) is up for re-negotiation in 2026, and it’s been reported that Trump wants to renegotiate that agreement early and these tariffs are a way to pull forward that re-negotiation.
Are Tariffs A Bearish Gamechanger? Not yet. Clearly this is an incremental negative because it’s another case of one of the bullish forces in this market being removed or sidelined. Since December, investors have seen several bullish factors negatively impacted. First, the Fed’s “hawkish cut” in December put a pause on the table and removed the idea of consistent rate cuts. Second, last week the DeepSeek news (an AI app) dealt a potentially serious blow to AI enthusiasm, so the market may be losing upside momentum from the largest and most important market sector (tech).
Now, the market is losing the expectation for pro-growth policy from Washington. Now, I do not think tariffs are a bearish game changer or a reason to reduce equity exposure today because earnings and economic growth (the two most important foundational forces for stocks) are still solid. But the factors that push stocks higher are being weakened or eliminated one-by-one and the factors that could push stocks lower are being increased and that’s a potential problem for a market so richly valued.
More practically, last week the “rest” of the market (think RSP) traded well despite the DeepSeek news. These tariffs potentially undermine that positive price action from the “rest” of the market and could weigh on other sectors while DeepSeek weighs on tech.
What’s Next? Determining whether these tariffs actually get implemented and how long they stay in place. The longer they are in place, the more negative it is for markets. First, it’s unclear the tariffs just announced are legal. The administration is using the International Emergency Economic Powers Act to bypass the USMCA law and a federal judge could throw out the tariffs as early as this week. Second, the tariff declaration is so vague it gives the administration tons of room to reduce or remove them without any actual concrete events (the quasi absurd 25% level and opaque nature of the link to fentanyl strongly hint the tariffs are negotiating tools). Trump will speak to Canadian PM Trudeau and Mexican President Sheinbaum yesterday about the tariffs and headlines from the call will likely be market moving.
Bottom line, most still believe this is all a negotiation and that the tariffs won’t be on for long (and that’s still probably right), but again, this policy volatility is starting to wear on investors and if we combine that with sudden AI vulnerability (DeepSeek) and high valuations, the recipe is coming together for a solid and extended pullback.
This is not permanent and should be tempered by earnings news and economic news. Most of the positive news from Washington will take time to hit the markets. For now, we will remain invested and ride out any temporary downturns.
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