Investors have been on a roller-coaster ride this year. The S&P 500 (SNPINDEX: ^GSPC) began 2025 with strong momentum. The good times didn't last long. By early April, the widely followed index was nearly in bear market territory. Fortunately, that downturn didn't last long, either. The S&P 500 rebounded by almost 30% from its 2025 low point and is now up by a double-digit percentage year to date.
There's a simple reason for this volatility: tariffs. Donald Trump called himself "Tariff Man" while campaigning for a second presidential term. Since returning to the White House in January, he has lived up to the nickname.
President Trump recently imposed stiff 50% tariffs on imports from India. He's threatening to levy 200% tariffs on imports from China. Nearly every other country on the planet has been hit by the president's so-called "reciprocal" tariffs, even those with which the U.S. maintains a trade surplus.
Meanwhile, the S&P 500 is at an all-time high. But can the market stay hot as Trump turns up the tariff heat?
Image source: Getty Images.
Paying the price
During last year's presidential campaign, Trump argued that his tariffs would be "a tax on another country." For example, speaking to voters in Wisconsin, he asserted that tariffs were "not going to be a cost to you, it's going to be a cost to another country." But the majority of the price increases stemming from tariffs are being paid by U.S. importers.
Goldman Sachs (NYSE: GS) conducted an analysis that found U.S. businesses paid 64% of the higher costs associated with tariffs in the first six months of 2025. American consumers paid another 22%. That leaves only 14% of tariff costs being absorbed by foreign exporters.
Those numbers could soon change. Goldman Sachs economist David Mericle told CNBC earlier this month, "If the most recent tariffs, like the April tariff, follow the same pattern that we've seen with those earliest February tariffs, then eventually, by the fall, we estimate that consumers would bear about two-thirds of the cost."
Trump disputed this analysis, posting on social media, "Tariffs have not caused Inflation, or any other problems for America, other than massive amounts of CASH pouring into our Treasury's coffers." However, in July, U.S. wholesale inflation as measured by the producer price index jumped by the largest percentage in three years. This indicates that, just as the Goldman Sachs analysis found, the higher prices caused by tariffs appear to be largely coming out of the pockets of U.S. importers.
However, the producer price index can often be a predictor of where consumer prices are headed. Inflation by that measure is already ticking upward: The core Consumer Price Index rose by 3.1% in July -- well above the 2% level that the Federal Reserve has long set as its target.
Ripple impacts
Could ripple effects from Trump's tariffs eventually cause stocks to tumble? Possibly.
If companies importing products into the U.S. continue to absorb the higher costs associated with tariffs, their profits won't be as high as they would otherwise have been. Stock prices tend to track with earnings over time. When earnings growth slows, so will share price growth.
But what if those companies choose to pass more of their higher costs along to consumers, as Goldman Sachs predicts? The inflation rate will rise, and even if the surge only proves temporary, the higher prices will persist. If that happens, many Americans could reduce their discretionary spending, which in turn could hurt corporate earnings. Again, the last domino to fall in this sequence would be stock prices.
It's also important to note that the dual mandate of the Federal Reserve is "to promote maximum employment and stable prices." When inflation rises, prices aren't stable. This decreases the likelihood that the Fed will cut interest rates, because while lower rates can juice the economy (which is sometimes a positive), they can also drive even higher inflation and price instability.
Meanwhile, the stock market appears to be pricing in expectations of strong earnings growth and rate cuts from the Fed. The S&P 500 Shiller CAPE ratio is at its third-highest level ever. The ratio of total stock market capitalization to GDP is at its highest level ever. Should tariffs lead to lower earnings growth and a delay in further rate cuts, stocks could very well sink.
Good news for investors
Is there anything positive for investors to hang their hats on? Actually, yes.
First, imports represent only around 14% of U.S. GDP. Most of the U.S. economy isn't directly impacted by Trump's tariffs. Many publicly traded companies won't be materially affected by the tariffs, either, especially those in service-oriented industries.
Second, the latest U.S. jobs report was much weaker than expected. This bad news is good news in one sense: It could increase the likelihood of another interest rate cut, since a key mandate for the Fed is to maximize employment.
Third, and most importantly, the stock market and the U.S. economy have proven amazingly resilient over the long run. Even if stocks fall because of Trump's tariffs, the pullback will present a great buying opportunity for astute investors. A rebound should come sooner or later.
