The S&P 500 (^GSPC 0.61%), the best barometer for the U.S. stock market, cratered 19% from its record high in the days after President Trump announced a slate of severe tariffs on April 2. The benchmark index has since rebounded slightly, currently just 12% below its high, because Trump paused the most aggressive duties for 90 days.
Wall Street experts anticipate uncertainty and volatility in the short run, coupled with an elevated chance of a recession. But analysts expect more severe consequences in the long run, such as a permanent reduction in economic growth and living standards.
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The near-term consequences of tariffs are uncertainty and stock market volatility
Economic uncertainty created by the Trump administration has put business leaders in a challenging position. Not only because the president has taken such an aggressive stance on trade, but also because he seems to waver on policy decisions. For instance, the reciprocal tariffs outlined on April 2 were paused for 90 days on April 9, which was the day the tariffs were supposed to take effect.
That pause affords the administration time to negotiate with trading partners, but also leaves businesses with little insight into the future. Is it better to build inventory today or purchase supplies at a measured pace? Is it more sensible to move manufacturing capacity to the U.S. or to simply seek alternate shipping routes? There are no good answers because the Trump administration has yet to finalize the variables.
BlackRock CEO Larry Fink recently told CNBC that capital expenditures are falling, meaning companies are spending less on property, plants, and equipment because they lack visibility. Uncertainty has also made the stock market extremely volatile. The CBOE Volatility Index, often called the VIX, hit 52.3 on April 8. The VIX has closed above 50 less than 1% of the time since 1990, according to strategist Charlie Bilello.
Investors can think about that volatility in two ways. On one hand, the S&P 500 has usually rocketed higher in the year after extremely high VIX readings. On the other hand, this situation is somewhat unique because the reciprocal tariffs outlined by President Trump would raise the average tax on U.S. imports to roughly 25%, the highest level in more than 100 years. That leaves the stock market in uncharted territory.
Meanwhile, many experts have expressed concern about the reciprocal tariffs dragging the U.S. economy into a recession. Economists polled in April by The Wall Street Journal put the odds of a recession in the next year at 45%, up from 22% in January. But JPMorgan economist Bruce Kasman has a more pessimistic outlook. His base case calls for a U.S. recession in 2025.
Here is the bottom line: If the U.S. reaches deals with trading partners that mitigate most (if not all) the tariffs outlined by President Trump, the S&P 500 could rebound sharply in the second half of 2025. However, even in the most optimistic scenarios, uncertainty will plague businesses for the next few months, which will almost certainly lead to more stock market volatility.
Image source: Getty Images.
The long-term consequences of tariffs are slower economic growth and fragmentation of alliances
Predicting the long term consequences of President Trump's tariffs is challenging. That's mostly because the duties the administration outlined will increase the average import tax rate to its highest level since the early 1900s, so there is little historical precedent. But predictions are also challenging because the precise tariff rates, targets, and exemptions (if any) are unclear at this point.
However, several Wall Street strategist and business leaders have issued dire warnings. Wedbush analyst Dan Ives said the tariffs proposed by President Trump represents the worst "policy mistake in the last 100 years." He also said they could set the U.S. technology industry back a decade while China steamrolls ahead. And JPMorgan CEO Jamie Dimon warned, "Economic fragmentation from our allies may be disastrous in the long run."
Morningstar economist Preston Caldwell recently wrote, "If they're maintained, the tariff hikes announced April 2 represent a self-inflicted economic catastrophe for the United States." He anticipates a permanent reduction in economic growth and living standards for the average American if the Trump administration forges ahead.
Similarly, Erica York at the Tax Foundation wrote, "History shows tariffs raise costs and prices and lead to lasting economic harm, such as lower production and living standards, whether we keep importing goods or switch to domestic alternatives." Data gathered over five decades from 151 countries supports that assertion.
Despite potentially devastating long-term effects, Wall Street analysts at 17 investment banks and research firms have set the S&P 500 with an average year-end target of 6,100. That implies 13% upside from its current level of 5,397 as of April 15, suggesting many analysts think the final tariff rates will be much more measured than what President Trump has advertised.
