Strictly enforcing immigration laws isn't likely to affect stocks all that much. Rebranding the Department of Defense as the "Department of War" won't either. Demolishing the East Wing of the White House to build a $300 million ballroom shouldn't cause a ripple in the stock market.
But tariffs are a different story altogether. These import taxes can significantly affect corporate earnings. And stock prices tend to correlate with earnings.
Will President Trump's tariffs cause the stock market to crash in 2026? There's good news and bad news for investors.
Image source: Getty Images.
So far, so good
The net impact of the tariffs levied since Trump returned to the White House a year ago can be summed up in four words: So far, so good. Granted, the president's "Liberation Day" tariff announcement caused the S&P 500 (^GSPC 1.52%) to plunge last April. However, the sell-off was only temporary, with the S&P finishing 2025 up 16%.
Investors shrugged off Trump's tariffs for several reasons. For one thing, the president postponed some tariffs multiple times. Trump lifted tariffs on some food imports because they were driving up grocery prices. He backed away from threats of exorbitantly high tariff rates. Some on Wall Street even began using an acronym they called "TACO," which was short for "Trump Always Chickens Out."
Equally important, many companies began aggressively increasing their imported product inventories even before Trump implemented tariffs. U.S. GDP even turned negative in the first quarter of 2025 as a result. This stocking activity provided a cushion to the earnings impact of the president's tariffs.
Finally, many importers have largely absorbed the higher prices resulting from tariffs rather than pass them along to customers. This move has helped dampen the inflationary effects of tariffs. And while absorbing high prices has weighed on profit margins, the impact hasn't been enough to cause stock prices to decline so far.
What could change in 2026
Now for the bad news. The relatively benign impact of tariffs on the stock market seen so far might not last much longer. Several things could change in 2026.
The inventory stockpiling that reduced the impact of tariffs on consumers in 2025 won't help this year. This could result in more companies passing higher prices from tariffs on to their customers in the coming months.
Indeed, BlackRock (BLK 3.07%) believes this scenario will play out this year. If so, this could cause inflation to rise and make the Federal Reserve less likely to cut interest rates. Neither outcome would be great for the stock market.
Morningstar (MORN +0.84%) is on the same page as BlackRock. The financial services company predicts that inflation will increase in 2026 as American consumers bear a greater share of the burden of higher prices resulting from tariffs.
The threat of tariffs related to President Trump's ambitions for U.S. control of Greenland could also reemerge. The president appeared to have backed down, based on his comments at the World Economic Forum in Davos, Switzerland, last week. Stocks soared afterward in what some might view as another example of the "TACO" trade.
However, Bank of America (BAC 2.87%) economist Ethan Harris recently argued that another acronym – "TATA" (Trump Always Tries Again) is more appropriate than "TACO." Should the president try again to use trade policies to gain control of Greenland, the stock market would likely react negatively.
Is a stock market crash on the way?
To be sure, none of this means that a stock market crash is definitely on the way. President Trump could continue to de-escalate tensions and abstain from any further tariff threats. Tailwinds for the stock market, particularly the ongoing generative AI boom, could offset any adverse effects from companies increasing prices for consumers to cover the added costs from tariffs.
Tariffs could weigh on stock prices in 2026 and create uncertainty (which investors strongly dislike). However, they probably won't cause a crash on their own.
