Market Plunges Amid Uncertainty over Trump's Tariffs

Investors reacted negatively to President Trump's announcement of hefty tariffs on Canada, Mexico, and China, triggering a significant market sell-off in early trading.

The tech-heavy Nasdaq Composite (^IXIC) lost around 1%, while the S&P 500 (^GSPC) declined by approximately 0.8%. The Dow Jones Industrial Average (^DJI) saw a drop of 0.4% or nearly 200 points.

The market volatility underscores the concern among investors that Trump may follow through on his tariff plans. Lori Calvasina, head of US equity strategy at RBC Capital Markets, stated that investors "underpriced the risk" of tariffs being more than a negotiating tool.

Despite Trump's previous statements regarding tariffs, markets and economists seemed to have dismissed the threat. However, the announcements of Friday and over the weekend seem to have caught them off guard.

The US dollar surged to 109, approaching its highest level in two years. Stocks in sectors likely to be affected by tariffs, such as retail and auto, also suffered.

Analysts from Morgan Stanley believe that "full implemented tariffs with staying power" are not yet reflected in market prices. They anticipate pressure on US equities and outperformance by service stocks over consumer goods.

Negotiations between the US and Mexico offer some potential for avoiding widespread tariffs. However, the weekend's announcements have created uncertainty that could impact markets in the near term.

JPMorgan's Michael Feroli notes that even if tariffs are reversed, "the increase in policy uncertainty will be hard to put back in the bottle."

Goldman Sachs' David Kostin highlights the potential "downside risk" to their S&P 500 earnings forecast due to the tariffs. He estimates a potential 5% near-term downside to the S&P 500's fair value if the market anticipates sustained implementation of the tariffs.

According to Kostin, the key question for investors is whether they believe the tariffs will be prolonged. If viewed as a temporary negotiation tactic, the market impact will be less severe. However, if perceived as a sign of escalating trade tensions, stocks could continue to fall.