Economists, market watchers and consumers alike are still trying to understand the implications of President Donald Trump’s announcement on Wednesday of sweeping new tariffs.
The plan, part of Trump’s “Make America Wealthy Again” initiatives, features a baseline 10% tariff on all U.S. trading partners as well as duties as high as 50% on nations with which the U.S. has a trade deficit. Imports from China, South Korea and Japan, for instance, face 34%, 25% and 24% tariffs, respectively. Products from the European Union will come with a 20% levy.
Reaction from investors was swift. The S&P 500 — a proxy for the broad U.S. stock market — ended Thursday’s session down 4.8% and now sits more than 12% below its February high.
Market watchers’ chief worry: economic turmoil. Should other countries respond to Trump’s tariff hikes by raising duties of their own, an escalating conflict could evolve into a trade war, which economists say could slow global economic growth.
And because tariffs are collected from importing companies, economic experts say U.S.-based firms who use foreign goods will likely pass at least some of the tariff costs along to customers — a move which could reignite inflation.
Here’s what economists and market experts say to expect.
Expect inflation, but not necessarily a recession
Should tariffs stay at the recently announced levels, the average rate on all U.S. imports would climb to 18.8%, up from 2.5% in 2024, according to estimates from the Tax Foundation.
But just because U.S. businesses are facing higher costs on imports doesn’t mean that they’ll pass a commensurate cost along to consumers.
Consumers are unlikely to feel the entire brunt of the increases, especially since businesses are aware that their customers already feel financially stretched, Jeffrey Roach, chief economist for LPL Financial, recently told CNBC Make It.
“In a weakening economy in general, consumers are going to be very sensitive to price changes,” he said. “I think corporations are going to say, ‘We’re going to eat some of this,’ and maybe not be able to pass along as much as they might think.”
Still, expect some prices to rise — at least in the near term.
“Higher tariffs will likely cause 3% to 5% more inflation over the next year and a half than the U.S. would have had without them,” says Bill Adams, chief economist for Comerica Bank. With inflation currently sitting at 2.8% year-over-year, that could mean a 2 percentage point rise this year (to 4.8%) followed by a 1 point rise next year, on the low end, he says.
And while reheating inflation could stress the economy, Adams and other economists believe there’s still room for growth, even with some headwinds.
“A recession over the next 12 months looks more likely than it looked at the start of the year, but we still think the economy will most likely expand in 2025, and 2026 in particular, because it looks likely that the administration will use tax revenues from tariffs to partially fund broader tax cuts that will come into effect next year,” Adams says.
Expect short-term market shakiness
An old Wall Street truism says that markets hate nothing more than uncertainty. And even though investors got their answer on what tariffs the administration would install, big questions remain about how those tariffs might evolve over time, including possible higher tariffs from other countries.
While the dust settles, “markets are going to be kind of jittery,” says Scott Helfstein, head of investment strategy at Global X. “It’s maybe a little lower from here, maybe a little higher from here, but largely sideways as we absorb the news from yesterday.”
Among the questions investors will still be looking for answers to: Will tariffs stay in place at current levels? Some market experts don’t think so.
“We would expect tariffs to be reduced from the levels announced by the President,” Mark Haefele, chief investment officer at UBS Global Wealth Management, wrote in a recent note. “The President himself invited negotiations, and Treasury Secretary [Scott] Bessent said in a Bloomberg interview that the announced tariffs are ‘the high end of the number’ and that countries could take steps to bring tariffs down.”
Don’t expect them to shrink significantly, however. When asked if Trump could reverse course, or if this was perhaps a negotiation tactic, U.S. Commerce Secretary Howard Lutnick was firm in his denial. “I don’t think there’s any chance,” he said in a CNN interview. “This is the reordering of global trade, right? That’s what’s going to happen.”
Some trading partners may not take kindly to those tactics, and some have already have already responded with tariff measures of their own. China and the EU, for instance, have already announced plans for economic countermeasures.
Overall, though, the economy was heading into the tariff announcement having shown some signs of fundamental strength, including a resilient job market and encouraging corporate earnings, Helfstein says.
Even if things are shaky over the short term, themes that were expected to drive growth in the market over the long run — such as gains in AI and automation — remain intact, he adds. Investors may just have to wait while companies sort through tariff-related business strategies.
“Those trends are going to continue — just maybe on a slightly different pathway.”
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