Tariffs: They're the centerpiece of President Donald Trump's second-term agenda, they're controversial, and they raise the price of imported goods.
But until recently, their effect on the stock market was primarily a topic for old economics textbooks. They haven’t been all that impactful since the Great Depression era.
That changed in 2025. Trump’s “Liberation Day” tariffs on April 2, 2025, led to an immediate two-day, 11% drop in the S&P 500. Why? What was it about the tariffs that led to the sell-off?
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The answer is complex, because there are a lot of moving parts. Let's make it as simple as possible.
How do tariffs work?
First, let's look at the basics. A tariff is a tax on imported goods. Contrary to popular belief, the tax is paid by the importer, not the exporter.
Taking Trump’s recently announced 46% tariff on Vietnamese goods as an example, the Vietnamese government doesn’t pay that; neither do local manufacturers. The American companies that import the merchandise get stuck paying the tax bill.
For example, shares of Nike (NKE) tumbled following the tariff announcement because Nike manufactures about half its shoes in Vietnam. Every shoe Nike imports will get 46% more expensive. Nike has the unpleasant choice of either passing the price hike on to consumers or eating the costs, taking a major hit to profits.
Tariffs will affect companies differently. Retail operations such as Home Depot (HD), Walmart (WMT) and Amazon.com (AMZN) and even mom-and-pop shops will be negatively affected. Logistics and shipping companies could also take a hit, because demand for imports falls when tariffs are high.
On the flip side, domestic producers such as steel and lumber mills primarily benefit from reduced competition. The same would be true for an automaker such as Tesla (TSLA) that manufactures substantially all its vehicles in the United States.
However, these benefits are partly offset by increases in component costs. For example, Tesla might enjoy a pricing advantage over automakers that produce a large chunk of their cars overseas, but they also must pay more for imported aluminum and steel.
Are tariffs normally good or bad for the stock market?
From a macro view, the economic impact of tariffs tends to be negative. But the specific tie to the stock market is harder to measure except in extreme circumstances, such as the "Liberation Day" tariffs. Most tariffs don’t normally result in an immediate 11% repricing of the stock market.
What is normal, and why is this time different?
Free trade allows for specialization and creates a more efficient economy with lower prices and greater consumer choice. This has been a core belief of virtually all economists since Adam Smith first wrote The Wealth of Nations. Tariffs disrupt free trade in goods and can lead to higher prices and fewer consumer choices.
Conceptually, it's easy to grasp that we're all a little poorer if we have to pay an extra $10 for a toaster. But how does that flow through to gross domestic product (GDP) or to the aggregate profits of the S&P 500? Some companies gain, others lose, but the net results aren’t generally going to move the market as a whole.
Another factor: The United States is primarily a services and information economy with world-leading tech, financial and health care firms. This means they stand to absorb the costs of tariffs but see no benefits to compensate, as tariffs are levied on goods, not services.
Tariffs will potentially increase a service company's expenses, meaning they'll pay more for imported electronics and equipment, but won't get any pricing advantage over foreign rivals.
Under normal conditions, tariffs might be a mild negative for the market but not enough on their own to move the needle much.
Why did the market react so much to Trump's tariff announcement?
Why was this time different?
It comes down to size. The "Liberation Day" tariffs were massive, significantly larger than the infamous Smoot-Hawley tariffs that plunged the world deeper into the Great Depression. As I write this, the tariff on Chinese goods is a shocking 104%. The very real likelihood is that we'll have a spike in inflation and a recession at the same time — something we haven’t seen since the 1970s.
Did the market overreact?
That depends on how serious Trump is about keeping tariffs at current levels. If 104% tariffs are the new normal, it’s possible the stock market didn’t react negatively enough.
Trying to price a market such as this is virtually impossible, because there are too many moving parts.
What should investors do about tariffs?
What is an investor to do? Buy the dip? Sell everything and hide?
Perhaps the best bet is to stick to your investment plan. If you own good stocks at good prices, you probably shouldn’t rush to dump them.
Instead, use this time to evaluate your position sizes and the overall level of risk you’re taking. If you’re nervous, there’s nothing wrong with rebalancing to a slightly more conservative portfolio or trimming some of your appreciated positions a little.
Related content
-
Don’t Miss Apple and Walmart Back-to-School Tax-Free Holiday Savings this SummerSales Tax Select states host sales tax holidays during the summer. Here’s what you can purchase.
-
The Rule of Retirement InversionThe rule of retirement inversion says that to have a great retirement, you must ask yourself what would ruin a great retirement — and then plan to avoid it.
-
How Divorced Retirees Can Maximize Their Social Security Benefits: A Case StudySusan discovered several years after she filed for Social Security that she is eligible to receive benefits based on her ex-spouse's earnings record. This case study explains how her new benefits are calculated and what her steps are to claim some of the money she missed.
-
From Piggy Banks to Portfolios: A Financial Planner's Guide to Talking to Your Kids About Money at Every AgeFrom toddlers to young adults, all kids can benefit from open conversations with their parents about spending and saving. Here's what to talk about — and when.
-
I'm an Investment Pro: Here's How Alternatives Could Inject Stability and Growth Into Your PortfolioAlternative investments can often avoid the impact of volatility, counterbalancing the ups and downs of stocks and bonds during times of market stress.
-
Dow Bleeds Red Due to Big Blue: Stock Market TodaySix of the official GICS sectors were in the green, led by communications services, technology and energy stocks.
-
July Fed Meeting: Live Updates and CommentaryThe July Fed meeting could be a lively economic event, with Wall Street keyed into what Fed Chair Powell has to say about interest rates and President Trump.
-
A Contrarian Approach Pays Off for This Small-Cap FundSmall-cap stocks have been hit hard by tariff worries, but this T. Rowe Price fund has outperformed thanks to its manager's against-the-tide approach.
-
A Financial Planner's Guide to Unlocking the Power of a 529 Plan529 plans are still the gold standard for saving for college, especially for affluent families, though they are most effective when combined with other financial tools for a comprehensive strategy.
-
An Investment Strategist Takes a Practical Look at Alternative InvestmentsAlternatives can play an important role in a portfolio by offering different exposures and goals, but investors should carefully consider their complexity, costs, taxes and liquidity. Here's an alts primer.
