The devil is in the details of President Trump's tariff and trade policy.
Though volatility is the price of admission to one of the greatest wealth creators on the planet, the stock market swings that investors have endured in 2025 have been extraordinary.
In early April, the iconic S&P 500 (^GSPC 0.40%) lost 10.5% of its value over a two-day period, which marked its fifth-steepest two-day percentage drop in 75 years. This historic volatility also thrust the growth-focused Nasdaq Composite (^IXIC 0.24%) into a bear market for the first time since 2022.
This was followed a week later by the S&P 500, Nasdaq Composite, and ageless Dow Jones Industrial Average (^DJI 0.47%) logging their largest single-session point gains since their respective inceptions. For only the sixth time since 1950, the S&P 500 has registered a 25% or greater gain in a three-month stretch.
Though an abundance of news has whipsawed Wall Street during this timeline, including quarterly operating results, a U.S. debt downgrade, and geopolitical tensions in the Middle East, the one common link fueling this rollercoaster ride is President Donald Trump's tariff and trade policy.
President Trump delivering remarks. Image source: Official White House Photo by Shealah Craighead, courtesy of the National Archives.
Despite the president's recent announcement of trade deals with Japan and the Philippines, a hidden danger lurking within Trump's tariff and trade policy threatens to sink the stock market.
Donald Trump's tariff announcement and pause roiled and reinvigorated Wall Street
The wild ride for stocks truly began following the close of trading on April 2. This day, commonly referred to as “Liberation Day” by President Trump, is when he initially unveiled the tariff and trade policy that roiled markets. He introduced a base global tariff rate of 10% and set higher “reciprocal tariffs” on dozens of countries that have historically run unfavorable trade imbalances with America. The S&P 500's aforementioned two-day swoon occurred on April 3 and April 4.
On April 9, with the stock market enduring a mini-crash, Donald Trump placed a 90-day pause on reciprocal tariffs for all countries save China. This 90-day pause is what ignited the strongest single-day point gains in the history of the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average.
Following an extension via executive order from President Trump on July 7, this 90-day pause on reciprocal tariffs will end on Aug. 1.
Aforementioned trade deals with Japan and the Philippines, as well as progress on a possible trade resolution with the European Union, have investors hopeful that this near-term uncertainty can be placed firmly in the back seat sooner rather than later.
But a deeper historical dive into Donald Trump's tariff policies reveals a hidden danger that threatens the very fiber of corporate profits, as well as the health of the U.S. economy.
Image source: Getty Images.
President Trump's tariffs come with a dangerous flaw
In December, four New York Federal Reserve economists working for Liberty Street Economics published a study (“Do Import Tariffs Protect U.S. Firms?”) that examined the various impacts of Trump's China tariffs in 2018-2019 for the U.S. economy and stock market. While some of their findings were expected, one in particular stands out.
For example, one of the least-surprising conclusions was that public companies exposed to Trump's China import tariffs in 2018-2019 performed notably worse on tariff announcement days than businesses with no exposure. Wall Street tends to value transparency and predictability above all else, and the introduction of tariffs removed some of these aspects.
Additionally, the companies that performed poorly during U.S. tariff events had worse future real outcomes, according to the four New York Fed economists. On average, labor productivity, employment, sales, and profits all declined from 2019 to 2021 for businesses with exposure to Trump's China import tariffs. In other words, the implementation of tariffs turned into a sustained headwind for a broad swath of public companies.
But the real devil is in the details — or in this instance, the lack thereof.
Liberty Street Economics notes that President Trump's tariff policy in 2018-2019 lacked differentiation between output and input tariffs, and this could be a problem, once again.
An output tariff is a duty assigned to a finished product being imported into the U.S. In comparison, an input tariff is a duty placed on a good used to complete the manufacture of a product domestically. Input tariffs can make domestic production pricier and/or less competitive with goods being imported from overseas. This can result in weaker sales, margins, and profits for U.S. businesses, which is precisely what the four economists observed from 2019 to 2021.
While most investors are focused on headline trade deals, they're overlooking potentially crippling input tariffs on steel, aluminum, and copper (copper tariffs go into effect on Aug. 1), among other goods. These tariffs run the risk of reigniting the prevailing rate of inflation, weakening corporate earnings, and ultimately sending stocks notably lower.
Time and perspective can trump Trump's tariffs
Although it's possible that Liberation Day 2.0 could spark a new wave of heightened volatility on Wall Street, and input tariffs can weigh on margins and corporate America's profits, there's a big difference between what might happen over the next year or three and where the stock market will be 10 to 20 years from now.
Based solely on historical precedent, vis-à-vis the Liberty Street Economics study, stocks with exposure to Trump's tariff and trade policy (i.e., most public companies) can expect some challenges during his second term in the White House. But this doesn't mean stocks are off-limits for long-term-minded investors capable of taking a step back and looking at the big picture.
It's official. A new bull market is confirmed.
The S&P 500 is now up 20% from its 10/12/22 closing low. The prior bear market saw the index fall 25.4% over 282 days.
Read more at https://t.co/H4p1RcpfIn. pic.twitter.com/tnRz1wdonp
— Bespoke (@bespokeinvest) June 8, 2023
A little over two years ago, in June 2023, the analysts at Bespoke Investment Group published a data set that calculated the calendar-day length of every S&P 500 bull and bear market since the beginning of the Great Depression in September 1929. These calculations revealed a night-and-day difference between periods of optimism and pessimism on Wall Street.
The average S&P 500 bear market has endured for 286 calendar days, or roughly 9.5 months, over a nearly 94-year period. On the other side of the coin, the typical bull market stuck around for 1,011 calendar days, or about three months shy of three years. Historically, the stock market spends a disproportionate amount of time growing versus contracting.
Additionally, 14 out of 27 bull markets, including the current bull market when extrapolated to present day, have lasted longer than the lengthiest S&P 500 bear market (630 calendar days), which spanned almost 94 years.
While there's no immediate cure for the uncertainty that Trump's tariff and trade policy brings to the U.S. economy and stocks in the short run, time and perspective have demonstrated that they can trump Trump's tariffs over the long term.
