February 3, 2025 – It's déjà vu all over again for the US stock market at the mercy of trade policy with President Donald Trump's latest salvo of tariffs sending shockwaves down Wall Street. A new 25 percent tariff on goods coming in from Canada and Mexico, with another 10 percent on goods coming from China, has fanned the specter of a global trade war anew. Investors scrambled for an assessment. The administration promoted these measures as vital for the security of the nation and to protect the economy, but their reception in the stock market reflected the uncertainty and risks of these aggressive trade policies.
A Rocky Week Start
The Dow Jones Industrial Average, S&P 500, and Nasdaq opened sharply lower in the Monday opening, as investors worried about what the tariffs were telling them. The Dow lost nearly 600 points at the opening bell-a harsh reminder of just how sensitive the market could be when trade happens to get disrupted. Stocks managed to claw back some losses by the end of the day, however; the Dow closed down 122 points, or 0.27%. The S&P 500 and Nasdaq ended the session down 0.76% and 1.2%, respectively. The partial recovery came on news of a one-month delay on tariffs against Mexico, after a deal with Mexican President Claudia Sheinbaum to deploy 10,000 soldiers to the border. But even in its rebound, the market is on edge. Goldman Sachs and Morgan Stanley both warned that a sustained tariff would be enough to pull the S&P 500 by 3 to 5%, with sector vulnerability making the pain worse. Material-intensive, consumer discretionary, and industrial-heavy consumers of cross-border supply chains are set to take hits.
The Trump tariffs are not a politically symbolic gesture, but an economically consequential one.
The Peterson Institute for International Economics estimated that the tariffs could cost the average U.S. household an additional $830 in 2025 alone, as higher import costs trickle down to consumers. The Tax Foundation projects the tariffs could shrink U.S. GDP by 0.4% while increasing taxes by $1.2 trillion over the next decade. Retaliatory measures already underway from Canada and China risk escalating the conflict further, which could push trading partners into recession and pull down global growth. The agriculture and car industries are already starting to feel the burn.
Farmers, through groups like the Western Growers Association, are preparing for retaliatory tariffs and have started lobbying for government handouts to soften the blow. Meanwhile, car manufacturers like General Motors and Ford-which heavily rely on parts from across borders in Canada and Mexico-are plummeting in their stocks. GM fell 5.5%, while Ford lost 3.9% in early trading. Tesla slid 5.4%, reflecting wider fears over the dent it will leave in tech-heavy industries that saw wider falls. The spillover effect reaches far beyond the borders of the United States: Mexico's peso is likely to lose almost 12% of its value, if the tariffs are fully implemented; and Canada, inextricably linked with U.S. trade, risks entering recession. Even China, despite the relative insulation from the first salvos by the wider reach of export markets, has threatened "necessary countermeasures"-in other words, a signal that this might well escalate into a long battle.
Market Sentiment and Sectoral Impacts
This has certainly sparked a frenetic and brutal backlash on Wall Street.
The panic among investors rushes toward shelters like demand for U.S. Treasuries while strengthening the dollar against its main peers; that and more defensive sectors are doing better. Among the weak segments, there was technology, alongside consumer discretionary. The vulnerability for the tech sector is big at this time because it also experienced a slump the previous week amidst competitive pressure related to DeepSeek AI by Chinese companies. Companies like Apple and Nvidia, too, have heavy exposures to Chinese manufacturing. E-commerce companies, reliant on cheap imports from China, such as Temu and SHEIN, could be the worst hit after the 10% tariff slapped on Chinese goods. Supply chain analysts also warned that such firms may not be in a position to absorb these added costs, and such costs could translate into either higher prices or slimmer profit margins for consumers.
On the other hand, a few industries could get a tailwind from the chaos. Domestic producers in industries like steel and aluminum might stand to benefit because the tariffs render foreign-made goods less competitive. Smaller-cap companies are often not at the whims of international trade-related gyrations and may come out relatively well because their focus tends to be local.
The Inflation and Fed Dilemma
Of particular concern to investors is how the tariffs increase inflation.
While JPMorgan Chase Chief Executive Officer Jamie Dimon has surrendered to the belief that tariffs probably are in the national security interest, they hold the potential as well to increase inflationary pressures in an already hot U.S. economy. The Federal Reserve, which earlier signaled a string of rate cuts for 2025, would likely delay any easing cycle as inflation concerns heat up. Meanwhile, bond yields rose and equities faced headwinds during the change in monetary policy expectations. According to estimates by Goldman Sachs, tariffs would lift core inflation by 0.7%, further complicating the balancing act by the Fed. For already-strained consumers, it could mean a further reduction of purchasing power to which economic growth is tied.
The Political and Strategic Calculus
Everything about the president's tariff strategy has as much to do with politics as economics.
Packaged as responses to illegal immigration, fentanyl trafficking, and unfair trade practices, the tariffs are calibrated to resonate with his base and to force trading partners to negotiate on his terms. There did seem a pragmatic streak to the administration's willingness to stand down on delaying tariffs on Mexico, but in the background was the threat of escalation. As early as 18 February, Trump threatened to unleash a second wave of duties, possibly encompassing other countries, including the European Union. Critics say it is a gamble that could very badly backfire. The Brookings Institution warns that Trump's protectionist agenda risks economic isolationism, undoing decades of integration into the global marketplace that have been a boon to the U.S. economy. An emboldened China, after years of preparations, may strike back with surgical blows-such as export curbs on key minerals-that would disrupt U.S. industry without engaging in all-out trade war.