How to Think About Tariffs in 2025

As the new administration begins, the prospect of new or expanded tariffs is a hot topic for investors. Mitch discusses how to plan for potential tariffs in the months ahead.

How Investors Should Think About Tariffs in 2025 When formulating an economic outlook for 2025, tariffs and trade policy should be top-of-mind for investors. Tariffs have been central to the new administration’s proposed economic policies, and we know from President Trump’s first term that tariffs were enacted in many cases and used for negotiations in others. In sizing up the potential impact of tariffs looking forward, a good place to start is by looking backward. Among the splashiest duties levied in 2018 were the steel tariffs on Mexico and Canada, which were met with retaliatory tariffs. Within a year, however, the tariffs were dropped, and NAFTA was replaced by the United States-Mexico-Canada Agreement—which expanded NAFTA’s scope and opened doors for more trade, not less.1 The tariffs that stuck and have largely been in place for over five years were tariffs on Chinese imports. The market, economic, and inflationary impact of these tariffs has arguably been quite muted, in my view. A lot of trade was ultimately rerouted through countries like Vietnam, India, and Mexico, at a time when inflation expectations were low and anchored. Consumers had not experienced significant inflation in decades, and businesses were reluctant to pass along any higher costs.2 Prepare Your Portfolio for 2025 Trade and Tariff Shifts Inflation and trade disruptions have tested the market, but 2025 brings new challenges. Staying informed on tariffs, economic policies, and shifting dynamics is key to navigating the landscape ahead. Our Stock Market Outlook Report 3 equips you with the insights you need to make confident investment decisions this quarter. Inside, you’ll find: Asset allocation guidelines for today’s market environment. Expert forecasts for inflation, rates, and economic trends. Industry tables and rankings to help you spot opportunities. Buy-side and sell-side consensus insights at a glance. And much more! If you have $500,000 or more to invest and want to take charge of your financial journey, click the link below to get your free report today! IT’S FREE. Download our Latest Stock Market Outlook Report 3 Fast forward to 2025, and tariffs are again a key question surrounding the economic outlook. There’s a good argument that we’ve already experienced a positive surprise—the worst fears of universal tariffs as a ‘Day 1’ order did not materialize and were replaced by a directive for government agencies to research and assess the feasibility of broad tariffs. Market participants saw this action as a sign of the administration taking a more cautious approach than campaign rhetoric suggested they would. To date, we’ve seen tariff proposals including 25% tariffs on goods from Canada and Mexico, 60% tariffs on China, and 10% universal tariffs. Creating a high starting point appears to be a negotiating tactic, but for markets it also sets expectations (and fears) at a high level, such that lower tariffs or no tariffs at all could register as a positive surprise. From an inflation standpoint, a scenario where these tariff threats are diluted to something like 20% on all imports from China with additional tariffs on autos from the EU and Mexico, I could envision a modest (30-40 basis point) bump to PCE inflation in 2025. A key reason for this projection is that, unlike President Trump’s first term, inflation expectations are somewhat elevated, given the experience with the inflation spike in 2022. If we saw an inflation uptick on this level, I think Fed officials and market watchers would easily identify the drivers in component details, which I think would lower the likelihood of a Fed response (rate hike) or a surge in long-duration Treasury yields. 10% universal tariffs would be a different ballgame, in my view. While modest tariffs may adjust consumer behavior or perhaps even force overseas manufacturers and producers to lower prices to remain competitive to U.S. importers, a universal tariff would almost certainly result in broad-based inflationary pressures. I could see inflation reversing course and moving past 3% year-over-year at the peak, with a hit to GDP growth. Businesses would face higher import costs, retaliatory tariffs in their export markets, and greater uncertainty. All in all, not good. This is also the scenario where I think equity markets would not respond well, given the downshift in growth. But the real pain, in my view, would come from the impact that higher inflation would have on long-duration Treasury yields. A sharp move higher in yields would almost certainly elicit a corresponding downdraft in a fully valued stock market, with high multiple areas of the market (Technology being an example) taking the biggest hit. Bottom Line for Investors The uncertainty of trade policy is not an automatic negative for markets, in my view. There are many avenues for positive surprises—tariffs could be lower than expected, avoided altogether, or implemented for short periods as new (and perhaps better) trade terms are negotiated. There is also the possibility that the implementation of tariffs could lead to a stronger dollar (which could offset part of the increased cost to U.S. importers) or that foreign manufacturers could lower prices to neutralize differences in the final price paid by importers and consumers. As ever with markets, it nearly all depends on how the reality of tariff increases compares to current expectations for tariff increases. If the result we see is better-than-expected, there’s a reasonably good chance markets would respond well over time—even if new tariffs are enacted. With these factors in mind, staying ahead of the curve is crucial. Our Stock Market Outlook Report 4 provides helpful insights to navigate trade policy uncertainties and capitalize on potential market shifts. Inside, you’ll find: Current asset allocation guidelines Zacks forecasts for the months ahead Zacks Rank industry tables Buy-side and sell-side consensus at a glance And much more! If you have $500,000 or more to invest and want to learn more about these forecasts, click the link below to get your free report today! FREE Download – Zacks’ Stock Market Outlook Report 4 About Zacks Investment Management Zacks Investment Management was born out of one of the country’s largest providers of independent research, Zacks Investment Research. Our independent research capabilities from our parent company truly distinguish us from other wealth management firms - our strategies are derived from research and innovation, including the proprietary Zacks Rank stock selection model, earnings surprise and estimate revision factors. 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