U.S. President Donald Trump signed an order on Saturday that imposes 25% tariffs on U.S. trade partners Canada and Mexico on imports from those countries. For Canadian energy companies, the tariff is slightly less at 10%. The order also includes a 10% additional tariff on imports from China.
The new tariffs are set to take effect on Tuesday, and already, Canada has announced a 25% retaliatory tariff on many U.S. imports that starts on Tuesday. Mexico said it would also hit back with tariffs on U.S. if the tariffs go into effect. Meanwhile, China said it will take countermeasures and file a legal action against the U.S. with the World Trade Organization.
While Trump had threatened tariffs during his campaign, the news was still stunning for investors and launched a broad trade war. U.S. stock markets all opened significantly lower on Monday with the Dow Jones Industrial Average down more than 600 points shortly after the opening bell. The S&P 500 was off 83 points, or 1.4%, while the NASDAQ Composite dropped about 320 points, or 1.6%.
But as the day wore on, the markets bounced back. That was likely due to a deal Trump struck with Mexico President Claudia Sheinbaum on Monday to delay tariffs for one month. Mexico agreed to fortify its border with 10,000 National Guard troops to stem the flow of illegal drugs into the U.S., while the U.S. committed to prevent trafficking of high-powered weapons to Mexico, according to reports. Trump was due to speak with Canadian PM Justin Trudeau later on Monday.
But if the tariffs remain in place, how would it impact stocks in the near-term?
Inflation will rise, economy will slow, experts say
The tariffs essentially levy an additional tax on buyers who import their products into the U.S. Previously, there was free trade between the U.S., and its trade partners, Canada and Mexico, so this huge jump comes as quite a jolt.
The tariffs are paid by the buyers, or companies, who import the goods, so it is essentially a tax on the companies. But the concern among many economists and analysts is that the companies will pass that on to consumers by raising their prices for those goods, thus causing higher inflation. At the same time, there are fears that it could slow growth.
“Virtually all economists think that the impact of the tariffs will be very bad for America and for the world,” said Joseph Stiglitz, the Nobel prize winning economics professor at Columbia University, according to the Century Foundation. “They will almost surely be inflationary.”
Stiglitz said it would also hurt U.S. companies trying to export products due to retaliatory tariffs. Further, it could lead to higher interest rates, with inflation potentially rising. That, in turn, could slow economic growth and corporate investment.
Canada and Mexico accounted for about 29% of U.S. imports in 2023, with 13.6% from Canada and 15.4% from Mexico, according to Canadian Bank RBC. China was about 13.8%. Further, Canada was the top import source for 23 U.S. states and second largest for 11. It was also the top export destination for 36 states, and second in another 8 states.
The Tax Foundation estimates that the 25% tariffs on Canada and Mexico and the 10% tariff would shrink U.S. economic output by 0.4% and increase taxes by $1.2 trillion between 2025 and 2034. That would represent an average tax increase of more than $830 per U.S. household in 2025.
The impact on the S&P 500
Several stock market analysts weighed in with projections on how the tariffs will impact stocks. Dave Kostin, chief U.S. strategist at Goldman Sachs, expects they will reduce corporate earnings and stock prices.
If the tariffs stay in place for a sustained period, Kostin said they will generally reduce his earnings forecasts by about 2% to 3% for companies on the S&P 500, reported the Financial Post. That’s not including the impact of potential rate tightening or a drop in consumer sentiment.
Kostin also said, reported the Financial Post, that the tariffs could result in a near-term drop of 5% in the S&P 500.
RBC Capital Markets strategist Lori Calvasina cites a similar impact, predicting a 5% to 10% drop for the S&P 500 if the tariffs sustain.
Further, strategists at JPMorgan Chase (NYSE:JPM) say the tariffs would lower their expectations for U.S. economic growth by 0.5% to 1%. It would also increase their outlook for inflation by the same amount.
“These tariffs create significant uncertainty in our economic and market outlook. Initially, our strategists believed significant tariffs on Canada and Mexico were unlikely due to their potential negative impact on North American growth,” the JP Morgan investment strategy team said in Monday commentary.
Which sectors and industries will be most impacted?
It is hard to know at this point if the tariffs will stay in place, or if some agreement is worked out and it is temporary. But if they do remain in place for a while, several industries could be impacted.
Most notably, according to CBS News, Mexico imported $45 billion in agricultural products into the U.S. in 2023, including fruits and vegetables and beef. And Canada imported about $40 billion in agricultural products, like grains, potatoes and beef, to name a few. So, grocery prices could go up and impact stocks in that industry.
Other sectors and industries that could be most impacted include housing due to lumber imported from Canada, energy, gas, cars, electronics, consumer goods, and semiconductor chips, to name a few.
On the other hand, Morgan Stanley (NYSE:MS) chief U.S. strategist Mike Wilson said companies in services industries would likely be less hurt than those in consumer goods, according to MarketWatch.
That includes financials, entertainment, software, media, entertainment and consumer services, reported MarketWatch. Consumer staples with strong pricing power would also be better equipped than many consumer discretionary stocks, Wilson added.