Trump's tariff policies: economic impact and market outlook ahead of 'Liberation Day'

Written by

Fabien Yip

Market analyst

Key takeaways

• Reciprocal tariffs to affect all countries, with larger impact on those with trade imbalances
• Markets have fallen since Trump's tariff announcements: S&P 500 down 7%, Nasdaq 100 down 10%
• Yale analysis: 20% tariffs could reduce purchasing power by $3,400-$4,200 on average per household
• Technical outlook suggests further market declines likely without decisive break above resistance levels
• Diversification and risk management crucial as trade policies reshape global economic relationships

What has Trump implemented so far?

Since his inauguration on 20 January 2025, President Trump has wasted no time implementing significant changes to US trade policy. His administration has moved aggressively with a series of tariffs on both countries and specific products:

• 4 February: 10% tariff on Chinese goods
• 7 February: temporary tariff exemption for Chinese goods worth less than $800
• 4 March: doubled tariff on Chinese goods to 20%
• 4 March: 25% tariff on all goods from Canada and Mexico (excluding Canadian energy), 10% on Canadian energy
• 7 March: temporary tariff exemption on USMCA compliant goods
• 7 March: reduced tariff on potash from 25% to 10%
• 25 March: 25% tariff on aluminium and steel imports

These swift and substantial actions signal a clear return to the "America First" trade policy that defined Trump's previous administration, with both trade rivals and partners experiencing the impact of these protectionist measures.

What may be coming next?

Tonight's 'Liberation Day' speech at the Rose Garden will focus primarily on reciprocal tariffs, which would allow the US to match the tariff rates that other countries impose on American goods. However, this is just one component of a broader trade strategy that the administration is expected to roll out in the coming weeks:

• 2 April: reciprocal tariff on all countries. The European Union (EU), Vietnam, Japan, South Korea, Canada and India have been named by the White House as countries with unfair trade flows. The Wall Street Journal reported a blanket 20% tariff is being considered.
• 2 April: 25% 'secondary tariffs' on imports from countries that buy Venezuelan oil. China, Spain and India are the current major buyers.
• 3 April: 25% tariff on automobile imports
• No later than 3 May: 25% tariff on automobile parts
• Sectoral tariff, likely impacting semiconductor and pharmaceutical imports. Details to be announced.
• Tariff on copper, timber and agricultural imports. Details to be announced.

Effects on the US economy from tariffs

Analysis from the Budget Lab at Yale paints a concerning picture of the economic impact these tariffs could have. Their research suggests a broad 20% tariff on all imports could increase consumer prices by 2.1% to 2.6%, resulting in a significant loss of purchasing power.

For the average US household, this would translate to $3,400 to $4,200 in reduced average household spending power -- a substantial hit to domestic consumption. The macroeconomic outlook is equally concerning, with the same analysis suggesting US real GDP growth could be 0.9 to 1 percentage point lower in 2025.

These estimates don't account for the additional sector-specific tariffs, which could further increase prices by 0.5% to 0.6% and reduce real GDP growth by another 0.2 to 0.3 percentage points this year. The cumulative effect could potentially tip the economy towards recessionary territory.

The impact would likely be felt unevenly across different sectors and income groups, with import-dependent industries and lower-income households potentially bearing a disproportionate burden of the price increases resulting from these trade policies.

Implications for financial markets

Financial markets have responded negatively to Trump's trade policies, with investors concerned about both inflation and recession risks. Since 21 January, the S&P 500 has fallen by 7%, while the tech-heavy Nasdaq 100 has dropped 10%.

Traditional safe-haven assets have benefited from this risk-off environment, with US government bonds up 2% and gold surging 13% over the same period. This flight to safety underscores the market's growing unease about the economic outlook under increasingly protectionist trade policies.

Despite this correction, US stocks remain historically expensive. The S&P 500 currently trades at a 12-month forward P/E ratio of 20.5, above both its 5-year average (19.9x) and 10-year average (18.3x) according to FactSet data. Analysts are projecting 12% earnings growth for calendar year 2025, exceeding the 9.5% growth realised in 2024. This suggests markets may not have fully priced in tariff impacts.

If the forward P/E ratio reverts to its 10-year average while earnings growth drops to 6%, the index could face a further 15% drawdown from its end-of-March levels.

Figure 1: Performance of different asset classes since Trump's inauguration

Technical analysis: where are markets heading?

Technical analysis of the US Tech 100 index shows it found support at 18,791 following last week's steep pullback. While a technical rebound is underway, significant resistance looms at the recent peak of 20,340.

Without a decisive break above the 200-day moving average at 20,537, the index appears more likely to resume its downtrend towards 18,300. This technical outlook aligns with the fundamental concerns about tariff impacts on the broader economy.

The US 500 presents a similar technical picture, having found support at 5,487, slightly below the 13 March low. The 200-day moving average at 5,837 represents major resistance to the current rebound.

The more probable scenario indicates a resumption of the downtrend towards the September low of 5,385. This technical perspective reinforces concerns that markets have further to fall as the full impact of trade policies becomes apparent over the coming months.

Figure 2: IG US Tech 100 index (daily) price chart

Figure 3: IG US 500 index (daily) price chart

How to trade market volatility during trade wars

When facing market uncertainty driven by trade tensions, developing a robust trading plan is essential. Market volatility can present both risks and opportunities for traders who are properly prepared.

Start by thoroughly researching which sectors and assets are most vulnerable to tariff impacts. Technology, manufacturing, and consumer goods companies with global supply chains typically face the greatest exposure to trade disruptions.

Open an account with a reliable provider offering a range of markets and risk management tools. Ensure the platform provides robust charting capabilities and news feeds to keep you informed of policy developments.

Search for markets that either benefit from or are insulated from trade tensions. During previous trade wars, defensive sectors like utilities and certain commodities have often shown resilience.

Place your trades with appropriate risk management strategies, including stop losses and position sizing that reflect the heightened volatility. Consider reducing your usual position size during particularly uncertain periods.