A tariff is a tax on imported goods and services. They are a form of trade regulation that governments use to protect domestic industries and shape international relations. When implemented, tariffs can spark higher inflation due to rising costs for businesses. Companies may pass these increased costs onto consumers, leading to higher prices for goods and services. This was evident in 2018 when companies cited tariffs and rising costs as headwinds, adding anxiety about higher inflation ahead. The rising U.S. dollar, often associated with tariff implementations, can also reduce foreign earnings for U.S. companies and impact stock market sentiment. In 2018, a small number of high-profile companies reported lower-than-expected earnings, partly due to tariffs and a rising U.S. dollar, which soured the market’s mood and erased stock gains for the year.
Tariff-related concerns and their impact on corporate earnings can contribute to stock market volatility. Big daily moves, both up and down, can occur as investors react sharply to news about tariffs and their potential consequences. This volatility can create uncertainty and lead to a decline in investor confidence. While short-term pullbacks due to tariff concerns can present opportunities for investors, the overall impact of tariffs on the stock market is generally negative. The uncertainty surrounding trade policies and potential retaliation from other countries can create a more challenging environment for businesses and investors.
Despite ongoing global tensions and the potential for higher interest rates, strong corporate earnings and economic growth can help markets stabilize and support a rebound in stock prices. However, higher volatility is likely to continue as long as tariff-related concerns persist. It is important to note that the overall impact of tariffs on the economy and stock market depends on various factors, including the specific industries affected, the duration of the tariffs, and the response of other countries. While some sectors may benefit from tariffs, others may experience significant challenges.