Trump Tariffs Spoiling Investor’s Party

It wasn’t so long ago that stock market investors were salivating at the launch of the Trump pro-US era with its promise of low taxation, de-regulation, less government interference, US manufacturing support, lower interest rates, and maybe even lower inflation and interest rates.

If it didn’t sound too good to be true then, it might be sounding so now. By early April, most of his paralyzing tariffs will be in effect. And in March the economic ripples will be underway. In a report, Goldman Sach’s showed that S&P stock prices dropped 5% on Trump’s tariff announcements during his first term as President. And the S&P dropped 7% when China retaliated. This time, Europe, Canada, Mexico and China will likely respond with matching 25% tariffs.

Trump’s preoccupation with heavy tariffs on imports shows he fears US companies still can’t compete well and need tariff walls to keep them above water. Tariff walls have the unfortunate side effect of letting companies get lazy with efficiency and innovation.  His pride position on trade relations is a factor, since he might not back down from and even enjoy these confrontations — leading to a full blown trade war.

Investor’s Response this Week

Today, Nvidia, the darling of the AI revolution, dropped $12 a share (down 13% in last 5 days) after its CEO reported outstanding revenue growth and healthy forward guidance. Most pundits forecasted a big jump in Nvidia’s price today. That did not happen.  The reason is that consumer sentiment is darkening and inflation is reawakening into a threat, while supply chains might fail. In this climate, further investment in AI infrastructure, software and business will wane.

The impact of tariffs for listed stocks will:

• raise business costs for lower corporate earnings
• cripple supply chains hampering product production and distribution
• reduce business sales and revenues thus reducing earnings
• reduce capex spending because it’s too costly and risky to invest
• reduce US exports when counter-tariffs hit
• causing layoffs of skilled staff which reduces company’s capabilities to produce and compete
• cause energy prices to rise, cripple consumer spending and flatten revenues
• makes stock’s unrealistic valuations more visible

Real effects won’t be felt until summer when US exports grind to a halt, consumer and producer prices rise, and supply chains fail. Given the integration of production and trade, it will take years to disentangle production processes.  It’s a mess!

Kicking Canada Around for Practice

The crushing of Canada’s economy along with humiliating comments and other bizarre behavior has to concern US investors.  While Trump insists the tariffs are justified and are appropriate retaliation to how unfair, Canada, Mexico, China and Europe have been over decades, how he’s enacting them will generate an economic slowdown.

The U.S. goods trade deficit with Canada was $63.3 billion in 2024, a 1.4% decrease ($926.9 million) over 2023.  Canada has a good surplus and a services deficit with the US. Overall, Canada does come out with a surplus benefit in trade.

It is imported oil from Canada that is the crux of the trade issue.  Canada would need to route that oil to distant countries, which the Canadian government is looking into now. That might solve the trade deficit.  Trump assumes loudly that he can run the Keystone XL pipeline to Alberta and extract 4.3 million barrels of oil per day at discounted WCS prices, and that no counter-action will happen.

And while the US has been willingly taken advantage of by most of its trading partners, Trump hasn’t sat down and worked out a trade deficit transition plan that would help all countries manage this major change in world trade.  Yet, he may have looked this over already and decided a calm transition would take too long and would come at the expense of the United States. With no plan B, the stage is set for a trade war, and a potential stock market crash.

Already, Elon Musk’s Tesla company has sunk below a $1 Trillion valuation which might curtail some of his high spending habits.

The Big Tariff Response to US Tariffs

The pain of such abrupt changes is rankling Canada, Mexico, China and Europe such that all of them intend to hit back with high counter tariffs. Trump says he’ll up the ante, which means we’re in for a major economic setback.  Trump does bluff, but it’s unlikely he can pull back on his threats or he’ll completely lose face in his country. Although he sees strength in his plan, he’s alienating allies while appeasing his enemies. Even in his playbook, how could this lead to anything good?

It appears his promise of returning manufacturing jobs to the US is agreeable to Americans.  Rightfully, they’re savoring the return of good paying jobs they’ve lost when free trade came in.  American workers might be on his side. This is why they voted for him.

As Trump brokers an end to the Ukraine/Russia war, he’s entertaining buying $3 billion in aluminum from Russia (the communist enemy) to compensate for trade barriers to Canadian aluminum. This situation has to worry a lot of Republicans. He’s looking to acquire resources from distant or enemy states to fill the Canadian void (a US friend).

And the US remains highly dependent on China who can put the squeeze on the US economy any time they wish. Take out needed resources from Canada, and why would we doubt an economic shock in 2025?

Counter Tariff Action Coming in March

In March, we’ll see intense counter-tariffs in play and the stock market will take a hit.  Will it be a large correction or a crash event?  Time will tell, but it seems to me, investors are in denial, while the mounting pressure of counter-tariffs looms.

In the US, consumer sentiment is sinking, and earnings will take a hit.

And Trump is overcommitted to expensive AI infrastructure investments, vulnerable now to cheap China made LLM’s and their lower power requirements. Although Nvidia did announce healthy earnings growth today, with a block on its advanced chip sales, and data center cost fears, how could we invest in a stock with an astronomical P/E ratio?  The stock is flat tonight.

And the earth is starting to shake for Palantir as well, whom many expect will be given huge government contracts from Trump and Musk. Palantir’s stock prices has been cut dramatically. AMD, Nvidia’s main competitor has seen it’s stock cut in half since it’s high last year.

When the world’s counter-tariffs hit, the US economy would be hit hard.  Lack of agricultural and parts imports will shutter many businesses.  It becomes a stand off and it’s hard to imagine this is going to go well. However, it does appear everyone thinks Trump will flinch and pull back on the Tariffs soon enough when the trouble becomes too intense.

Trade experts and economists don’t seem too certain about the outcome of the trade battle. They just know it’s not going to be pleasant.  In Canada for instance, once auto parts slow from Canada and US automobiles top coming in from the US, the auto sector will see massive layoffs and tax base losses for Ontario and Canada.

That will fuel intense anger and a big war of words between the world’s two closest allies. This is when the major Democrat news networks (CNN, CNBC, ABC, NBC, etc.) will pick up the issue and Americans will understand what’s happening.

Canada’s Trump Card is Alberta Oil

If Canada’s government decides to slow crude oil into the US (4.3 million barrels today), it will raise gasoline and other fuel prices significantly. Only a small reduction in supply has big consequences for prices.

Further, a tariff on electric power from Quebec could shut down data centers, EV recharging, raise business costs, and raise power prices for Americans in the eastern states. No aluminum imports in the US from Quebec also would impact US manufacturers where aluminum is widely used in products. Canada could almost shut down the auto manufacturing business in the US.  The US lacks the needed skilled workers and are years away from manning their own plants.

Canada can tariffs agriculture from Florida, Arizona and California making them too expensive for Canadians to pay in CAD currency.

Europe and China threaten the same way.

With respect to the stock market, this tariff war will build to a critical mass event, which will crash the Dow Jones, S&P, NASDAQ and Russell 2000 indexes.  Bitcoin, Tesla, Proctor & Gamble, General Motors, Boeing, 3M, Caterpillar, Johnson & Johnson, as examples, might be most impacted.

Of course, the outcome is entirely predicated on political decisions and we can’t predict how Trump is going to respond to this self-made mess.

See more on the US stock market forecast.