The stock market has started strong under President Trump’s second term, but potential tariffs remain a concern for investors. The implementation of these policies could significantly impact the market’s direction. Jeffrey Schulze, head of economic and market strategy at ClearBridge Investments, noted that “policy sequencing” could be an issue.
If tariffs are put in place before the benefits of tax cuts and deregulation are felt, it could temporarily pressure stocks. “Potential market headwinds may come into greater focus before possible tailwinds are felt. This progression would be a reversal from the first Trump presidency when the benefits from deregulation and tax cuts were felt first, before giving way to 18 months of tariff-induced choppiness,” Schulze said.
A chart from ClearBridge showed that the S&P 500 stalled during the middle of Trump’s first term when trade war headlines impacted the market. However, the tariffs are well telegraphed this time, and investors have more experience dealing with Trump’s policies.
Tariff concerns impact market confidence
Schulze believes that “Importantly, tariffs should come as less of a surprise to markets this time around, and robust fiscal support to the economy should overpower the tariff drag in subsequent quarters.”
The actual content of the tariff policy is crucial for investor confidence. While Trump has hinted at broad tariffs, many on Wall Street expect a more targeted approach. “The probability of 10%-20% across-the-board blanket tariffs, in our minds, looks extremely low,” said Richard de Chazal, macro analyst at William Blair.
A more modest tariff policy could be welcomed by the stock market but might shift focus to the debt market. Trump has backed tariffs as a revenue-raising tool, so reducing them could result in fewer tax cuts or more deficit spending. “The President cannot have it both ways when it comes to the tariff revenue generated.
If tariffs are being used as one of the main ‘pay-fors’ to support tax cuts and other spending initiatives, then those tariffs need to stay in place and be more than just a short-term negotiating tool,” de Chazal added. As of midday trading on Friday, the three major market averages were all up at least 2% for the week but were slightly down for the day. Investors remain cautious as they await more detailed tariff policies from the Trump administration.
