'There is no forecast': Wall Street still doesn't know what to make of Trump's tariff plans
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Wall Street is back in a familiar position. No one knows what will actually happen with Donald Trump’s tariff policy.
On Sunday night, a clear market narrative emerged: Donald Trump was actually going to implement the tariffs he’s been talking about for weeks. Investors were caught off guard, and stock futures sold off swiftly.
Less than two hours into the trading day on Monday, Trump’s announcement that tariffs on Mexico would be delayed for a month put a large dent in that narrative.
Stocks rallied significantly off their lows of the day following the news. And then, 36 minutes after the markets closed, Canadian Prime Minister Justin Trudeau posted that after a “good call” with Trump, the tariffs would be paused for “at least 30 days” while the countries hash out various border agreements.
What a ride. But a few clear trends have emerged following a volatile 24 hours.
For starters, the market is clearly “underpricing” tariff risk, showing a hopeful bias that these tariffs will end up being bargaining chips in service of the Art of the Deal as new agreements are hashed out.
Dating back to last Friday, any inkling that Trump will follow through with 25% tariffs on both Canada and Mexico has sent stocks lower. And any news that the tariffs won’t be as bad as threatened has spawned a relief rally, as seen in Monday’s recovery in stocks.
The same goes for China. Beijing quickly slapped tariffs on US energy imports on Tuesday, in response to new US duties on its goods. But the response was seen as restrained by some Wall Street analysts, and the stock futures response was muted.
This speaks to market fears about tariffs stoking inflation and slowing economic growth. Some, like Capital Economics chief North America economist Paul Ashworth, have argued widespread tariffs would likely “shut the door” on Federal Reserve interest rate cuts.
And as Goldman Sachs head of US equity strategy David Kostin pointed out in a note to clients, policy uncertainty combined with the actual economic impact of hefty tariffs could weigh on S&P 500 earnings growth in 2025.
“To the extent investors believe the tariffs will be a short-lived step toward a negotiated settlement, the equity market impact would be smaller,” Kostin said. “In contrast, equities would fall further if investors view the latest tariff announcements as signals increasing the probability of additional escalation.”
But exactly which of those scenarios plays out is, of course, the pressing question for investors. And any answer still seems to be more of a guess than a certainty.
“Perhaps the main takeaway is that no one knows what is going to happen [regarding] tariff policy,” Charles Schwab strategist Kevin Gordon wrote on X. “There is no forecast.”
Even when there are projections or expectations, they seem a bit more like how most of us feel about the weather forecast.
As of Jan. 29, Polymarket, a popular online betting offering, was pricing in just 20% odds that Trump imposed 25% tariffs on Canada and Mexico. By Sunday, the odds were closer to 90%. Guess the clouds rolled in after all.
Perhaps that’s the real takeaway from the past few days of market action. The “political fog” many have discussed is here. When it lifts, and what’s on the other side, is really anyone’s guess.
As JPMorgan chief US economist Michael Feroli said on Sunday, “Even if tariffs are called off tomorrow, the increase in policy uncertainty will be hard to put back in the bottle.”
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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