By President Donald Trump’s tariff announcement over the weekend jolted markets as investors worry about the economic ramifications of a new trade war.
Many on Wall Street see the proposed 25% tariffs on Canada and Mexico and 10% tariffs on China as risks to dragging down economic growth and rekindling inflation.
But not all Wall Street pros are convinced the tariffs will have a material effect on the economy. Some simply see them as a negotiating tool that won’t be in effect for that long, if at all.
It’s a fast-moving situation. As markets were selling off on Monday morning, President Trump said he’d reached a deal that would delay tariffs against Mexico for a month after a phone call with Mexican President Claudia Sheinbaum.
The announcement sparked a reversal for the market, with US stocks paring the deepest losses around midday. However, the threat of steep tariffs on Canada and China as soon as Tuesday still looms over investors.
Here’s how some strategists on Wall Street see a new trade war playing out under Trump.
Bank of America: Expect China tariffs to be permanent
“We view the tariffs against China as part of broader geopolitical conflicts between the two superpowers. While there might be some reductions or exclusions, we think tariffs will largely remain in place, like those implemented in 2018. Our base case remains that tariffs against China will eventually rise by 20pp on average (or double the Feb 1 increase) from the prevailing average rate of 20%,” Bank of America wrote in a Monday note.
UBS: Short-lived tariffs against Mexico and Canada
“We do not expect the 25% tariffs on Canada and Mexico to be sustained for a prolonged period. The Trump administration would not want to jeopardize US economic growth or risk higher inflation by leaving the tariffs in place for a sustained period, and significant stock market volatility could lead to a change in approach,” Solita Marcelli, Chief Investment Officer Americas at UBS Global Wealth Management said in a Monday note.
Goldman Sachs: Tariffs will hit S&P 500 profits
“Large tariffs pose downside risk to our S&P 500 earnings estimates and return expectations. If company managements decide the absorb the higher input costs, then profit margins would be squeezed. If companies pass along the higher costs to its end customers, then sales volume may suffer,” Goldman Sachs strategist David Kostin wrote in a Sunday note.
The strategist predicted a 5% downside move in the S&P 500 if Trump’s proposed tariffs are implemented and sustained.
Fundstrat: Different than 2018
Fundstrat’s Tom Lee said in a note on Monday that Trump’s tariff threats are different today than they were in 2018.
“This is a ‘drug war’ not ‘trade war,'” Lee said, highlighting that Trump’s stated reasoning behind the tariffs is to stop the illegal flow of fentanyl into the country.
“While one might suggest that the end result is the same, there is a difference. The lifting of these sanctions arguably is more flexible. Because this requires the other nations to cooperate on these objectives. To me this is a reason we expect the markets to be less panicked about this,” Lee said.
ING Economics: Tariffs to hurt low-income consumers
“Much of the cost increase caused by tariffs will be passed onto US consumers. The burden will fall disproportionally on low-income households who spend more of their income on physical goods relative to higher income households who spend more of their income on services and experiences, which aren’t subject to tariffs<" James Knightley, an economist at ING, said in a Monday note.
Knightley estimates that if enacted, the proposed tariffs would increase annual spending costs by $835 per American.
Capital Economics: Say goodbye to Fed rate cuts
Paul Ashworth, economist at Capital Economics, said the risk of tariffs rekindling inflation would limit the Federal Reserve’s ability to cut interest rates.
“The resulting surge in US inflation from these tariffs and other futures measures is going to come even faster and be larger than we initially expected. Under those circumstances, the window for the Fed to resume cutting interest rates at any point over the next 12 to 18 months just slammed shut,” Ashworth wrote in a note on Saturday.
Marko Kolanovic: Trump won’t cave in the face of market panic
Marko Kolanovic, the former chief stock strategist at JPMorgan who left the bank last summer, said Trump might be more immune to the pressures of a falling stock market than he was during his first administration. Trump used the stock market as a scorecard during his first term, and some believed he’d be quick to reverse course if stocks tanked in reaction to his policies.
But Kolanovic says it might be different this time.
“Those who point that Trump cares about stock market, should remember that even then he did not react until ~5% decline. Tolerance for declines could be higher now, and markets are at highs,” Kolanovic posted to X on Sunday.
