If there was one word that could sum up the entire first quarter of 2025 it would be “tariffs”. The word tariff has caused uncertainty in the stock market, economy, and with the consumers and businesses alike. This update will take a deeper look into tariffs. The focus will be to provide the reader with a better understanding of what tariffs are, how they work, the intention behind them, and possible scenarios of what this could mean to the consumer going forward as we race towards the April 2nd announcement of additional tariffs.
What is a Tariff?
A tariff is a tax that a government adds to products imported from another country. The main goal is often to make foreign goods more expensive so that people are more likely to buy locally made products. Sometimes, tariffs are also used as a bargaining chip in trade negotiations.
How Do They Work?
Tariffs are not paid by the foreign country; they are paid by the American company that imports the product. That added cost can be handled in one of two ways: the company can absorb it to keep prices steady, or it can pass the cost on to the consumer. Most companies prioritize protecting their profit margins, especially since those margins play a key role in quarterly earnings reported to Wall Street. As a result, the increased cost often ends up coming out of the consumer’s pocket, even though many companies today operate with historically high margins and arguably have room to absorb some of these expenses.
Here is a hypothetical real-world example of a 25% tariff on imported furniture from China:
Let’s say an American furniture company imports a dining table from China for $400. With a 25% tariff, the U.S. government charges a $100 tax at the border. So now the cost for the importer is $500.
Here’s how that cost might flow through:
- Importer pays: $400 + $100 tariff to US Government = $500
- Wholesaler marks up: Sells to a retailer for $600
- Retailer marks up: Sells to a customer for $800
Without the tariff, the final price to the consumer might’ve been closer to $700. That extra $100 isn’t because of higher quality, it’s just the ripple effect of the tariff.
Now multiply that across thousands of products—furniture, automobiles, appliances, electronics—and you start to see how tariffs can quietly raise costs across the board. For investors, these added costs can affect consumer spending, company profits, and even how markets respond.
Tariff-related news has made headlines nearly every day, but formal policy actions—such as threats, enactments, and reversals—directly impacted almost half of all trading sessions in the first quarter. The chart below focuses solely on events originating from the White House. If you included court rulings, responses from foreign governments, and reciprocal measures, it’s fair to say tariffs have influenced the market daily. The constant and unpredictable nature of this news flow creates ongoing uncertainty, something the stock market historically dislikes.
Source: https://www.nasdaq.com/market-activity/index/spx/historical ,
https://apnews.com/article/tariffs-timeline-trade-war-trump-canada-mexico-china-a9d714eea677488ef9397547d838dbd0,https://www.washingtonpost.com/business/interactive/2025/trump-tariffs-enacted-effect-threatened/?itid=sr_1_87c60d1f-add3-4904-8b57-70c43b550f36
So far in 2025, the U.S. has either enacted or threatened several major tariff actions, reigniting concerns around global trade tensions. In March, a 25% tariff on imported steel and aluminum took effect, targeting countries with excess production, notably China and Russia. Shortly after, the administration announced a 25% tariff on foreign-made cars and auto parts, set to begin in April—raising alarms for global automakers and U.S. dealerships alike. Additionally, new tariffs have been floated on solar panels and certain types of semiconductors, which would impact both the energy and tech sectors if implemented. Most recently, the President has promised specific actions on April 2nd, and will disclose the specific details at 3:00 pm. The Market does not know what these specific actions are, and the uncertainty throughout the quarter is the catalyst behind the current stock market retreat.
Market Uncertainty
This flurry of trade activity adds layers of uncertainty for markets. Businesses struggle to plan around shifting costs, supply chains become less predictable, and consumers may face higher prices on everything from vehicles to electronics. For investors, the real challenge is that markets dislike uncertainty. It clouds earnings forecasts, disrupts sentiment, and often triggers volatility as Wall Street tries to assess the broader economic impact. This uncertainty, while apparent in the stock market, is rippling to investors, consumers, and the economy.
The current investment climate has also generated concern about a future recession, as Google search queries indicate.
As is evident in the four charts above, there have been times when the data hyper focuses on an issue that becomes a clear and present danger. There have also been times throughout history where these concerns never manifest themselves into reality, like the 2022 recession. At the time everyone thought a recession was around the corner and it never came to fruition. Today the unemployment rate is at 4.1% (March 7, 2025 report), which is well below the 5.7% average for the data series that dates back to 1948. Despite moderating, consumer spending still rose in February. GDP, while a lagging indicator, remains positive and does not show any signs of recession (negative GDP data is one ingredient in forecasting a recession). The yield curve has remained out of inversion territory (where shorter-term rates are higher than longer-term rates), which has been an historical precursor to a recession, except in 2022. Inflation has remained firmer, as measured by Personal Consumption Expenditures (PCE), which is the Fed’s preferred inflation gauge. However at a current reading of 2.5%, that is that is nowhere near the 2022 peak of 7%. To put it clearly, the data are still showing signs of resilience.
Recession Fears
JPMorgan has created several pieces that break down the various ingredients that the National Bureau of Economic Research (NBER), the final authority of announcing recessions, uses to let the public know whether we are in an expansion or recession. First, they created a five-factor model that looks at GDP, private sector debt service (how much of the private sector’s disposable income goes to paying off principal and interest on debt), economic momentum (whether the economy is slowing or charging forward), corporate profit margins, and financial markets. They aggregate these five factors into a model, and it presently measures the chance of a recession in the next 12 months at 20%, based on tariffs, current policy, and the concern of a broader trade war. There is always some chance of a recession in this model, even at the rosiest of times. The data goes back to 1987, and the probability has never been below 10%. A 20% chance is not a sign of an imminent recession, but the 24/7 news cycle does not help fanning the flames and stoking fear. A message to the reader: Bad News Sells and today that means a title or quote that gets you to click on a story. Clicks generate ad revenue for the publication or site.
JPMorgan also produces a heatmap, displayed below, that examines the individual ingredients that the NBER is monitoring to make their recession calls. While this data is through 12/31/2024, two of the six metrics show a small sign of mild warming, presently represented by the peach color (household survey employment and industrial production). Of note, they are still a couple of shades from red. If you examine the far left-hand side, you will see the lingering data points from the 2020 pandemic recession. All the factors were in red coloring and at that time the US economy was in a recession. This offers a nice comparison to where we are presently. This chart will be updated through the end of the first quarter when the next Guide to the Markets (GTM) is released shortly after the end of the quarter.
Intentions of Tariffs
Shifting the focus now to the intentions of tariffs. They benefit the U.S. government in a few keyways, though those benefits come with trade-offs:
· Revenue Generation -
When a tariff is applied to imported goods, the U.S. government collects that tax directly from the importer. This creates a stream of income—especially when tariffs are applied to high-volume or high-value goods. Historically, tariffs were a major source of federal revenue before the U.S. established income taxes.
· Leverage in Trade Negotiations -
Tariffs can give the government a bargaining chip in trade talks. By imposing or threatening tariffs, the U.S. can pressure other countries to reduce their own trade barriers or change practices that are seen as unfair to American businesses, like the tariff they impose on U.S. goods entering their country.
· Protecting Domestic Industries -
Tariffs can shield U.S. industries from cheaper foreign competition. For example, a tariff on imported steel might help American steel producers maintain market share, preserve jobs, or avoid shutting down.
· Encouraging Domestic Investment -
By making imported goods more expensive, tariffs can make it more attractive for companies to invest in local production. This can lead to the growth of domestic industries, increased capital spending, and innovation in sectors that might otherwise struggle against cheaper foreign competition.
· Reducing Trade Deficits -
Tariffs can help reduce a trade deficit by discouraging imports. When imported goods become more expensive, consumers and businesses may shift to domestic alternatives. Over time, this can help balance the flow of money going out versus coming in, which some policymakers view to strengthen the national economy.
That said, while the government may benefit from increased revenue or strategic leverage, the broader economy can feel the sting through higher prices, supply chain disruptions, and slower growth—making the net impact a delicate balancing act. The wild card in all of this is whether countries can reach agreements or if they escalate tensions by retaliating against each other, leading to a broader trade war.
This graphic provides a clear understanding of how much this trade imbalance has changed over the years. The US has relied more and more on imports from foreign countries versus producing these goods domestically, as a trade deficit was non-existent in 1974. On the right side of the first chart below there is a break-down of which nations have the largest trade imbalance with the US. Reviewing the countries listed, out of the total 2024 trade deficit of $1.1 trillion, China accounts for $285 billion of it while the EU accounts for $226 billion, and so on. In the second chart below is the notable expansion of the trade deficit since 2017.
Growing up in the Detroit suburbs, I clearly remember every car on the road was American made. You simply didn’t see foreign cars on the road. This was something I always noticed when I travelled outside of Michigan. And as I grew up and moved out of the state, I recall going back to visit family and seeing the tidal shift of foreign cars on the Detroit highways. Maybe it hit closer to home for me too as my father worked for Ford until I was in junior high.
Scenarios for a Path Forward
The uncertainty has caused market volatility and on March 13, 2025, the S&P 500 entered correction territory. To put it another way, the market has pulled back 10% off its February peak. Note that corrections are not bear markets, and that term is reserved for a 20% pullback from the peak. Since 1974, only six market corrections have continued to lower to result in a bear market! That is out of the 27 recorded corrections since November 1974. In fact, using data back to 1954, the market experiences 10% correction every 30 months, on average. This translates to market corrections averaging about one every 2.5 years since 1954. Even turning to more recent data and only examining from 2000 forward, there have been 13 corrections, including the current. Only four have manifested into bear markets and three of those four were connected to Black Swan events (2000/2001 – tech bubble and 9/11, 2007 – Great Recession / Bank failures, & 2020 – Covid pandemic). Putting the current pullback into context next to those events offers a good contrast between where we are now.
Whether tariffs are used as a negotiating tactic and are quickly unwound or whether they evolve into a tit-for-tat reciprocal tariff war between nations remains to be seen. The goal of creating revenue for the U.S. and to even out the trade deficit does require change. That change creates uncertainty and that can lead to the market volatility that we see today. If tariffs are short-lived, it should not result in inflation and higher prices to the consumer while also putting the U.S. on a more even playing field in global trade. If tariffs become persistent and evolve into a trade war, only time will tell what the outcome may be. One thing is certain, this will not last forever. And thinking back through the last 12 corrections we have experienced since 2000; do you recall the catalyst?
In closing, I would like to share a chart that Goldman Sachs created that illustrates the performance of the S&P 500 post-correction. The key takeaway, especially if the U.S. economy does not enter a recession is to stay the course.
If you are not presently a client and would like to discuss your personal circumstances, please do not hesitate to reach out to me.
Feel free to schedule a quick 15-minute virtual introduction meeting.
Rob Leiphart, CFP®
203-220-6474
rleiphart@rbcapitalmanagement.com