In the complex dance of global trade, few policy tools generate as much debate as tariffs. Simply defined, a tariff is a tax imposed by one country on goods imported from another. 

Governments often use tariffs to protect domestic industries, punish trading partners or address trade imbalances. But while the intentions behind tariffs may be strategic or political, their impact on the stock market is far from straightforward. Investors are left to weigh both potential gains and looming risks.

When tariffs are introduced – especially unexpectedly – they can ripple through the economy, changing the cost of goods, altering supply chains and shifting corporate strategies. Whether these changes help or hurt the stock market depends on a web of factors. Understanding how and why markets react to tariffs can shed light on a broader truth in finance: stocks can climb a wall of worry, but never a wall of uncertainty.

 

Why tariffs might hurt the stock market

Higher costs and lower profits for companies. Tariffs raise the cost of imported goods, and for companies that rely on global supply chains, this can translate directly into higher input costs. When companies pay more for materials, parts or finished goods, profit margins shrink unless they pass those costs on to consumers – something not always possible in competitive markets. Lower corporate profits often mean lower stock valuations.

Global trade tensions and retaliation. When one country imposes tariffs, others often retaliate. A tit-for-tat trade war creates instability in global commerce, particularly for export-heavy industries like technology, manufacturing and agriculture. Companies facing shrinking international markets or blocked access to foreign consumers often see their stock prices decline in anticipation of weaker future earnings.

Reduced business investment and consumer confidence. The threat of tariffs injects uncertainty into future planning. Businesses may delay capital investment or hiring if they’re unsure how trade rules will evolve. Meanwhile, consumers facing higher prices on everyday goods – from cars to electronics – may scale back spending. Both trends signal slower economic growth, a red flag for investors.

 

Why tariffs might help the stock market

Boost to domestic industries. Tariffs can protect local companies from foreign competition, giving them a price advantage in the domestic market. For example, if imported steel becomes more expensive due to tariffs, American steel producers may benefit from higher demand and pricing power. Stocks in these sectors can rise on expectations of stronger earnings.

National security and supply chain resilience. Investors may view tariffs as a long-term positive if they encourage more resilient and diversified supply chains. Recent global events – from pandemics to geopolitical conflicts – have shown the risks of over reliance on foreign manufacturing. Tariffs that support reshoring or the development of domestic alternatives may be welcomed by markets seeking stability.

Government support and subsidies. Tariffs are often paired with domestic stimulus to offset short-term pain. For example, governments may support affected industries with tax breaks or subsidies. Such policies can reassure investors that the state is willing to protect national champions or key sectors, leading to renewed confidence in the companies’ future outlook.

 

The crucial difference: worry vs. uncertainty

Markets are built on expectations. Investors expect recessions, inflation, interest rate changes and even geopolitical conflicts. These events cause worry – but not necessarily panic – because they can be measured, modeled, and priced into stock valuations.

That’s why it’s often said, “stocks can climb a wall of worry.” Even when headlines look grim, markets can rally if investors believe the situation is temporary, controlled, or ultimately manageable.

Uncertainty, however, is another story. When investors lack the ability to predict outcomes or gauge the rules of the game – such as in the case of erratic tariff announcements, shifting trade policies or breakdowns in international agreements – they hesitate. This pause can lead to market pullbacks, sharp volatility, or even prolonged downturns.

In short, worry challenges confidence. Uncertainty removes it altogether.

 

Why planning is important

Tariffs are neither inherently good nor bad for the stock market. Their impact depends on timing, context and investor perception. They can harm international growth prospects or bolster domestic industries. They can cause painful disruptions or inspire long-term reform. But the key for investors is not whether tariffs exist – it’s whether the rules surrounding them are known and consistent.

Because at the end of the day, markets can process risk and fear – but they cannot function in a fog. In the world of investing, “Stocks can climb a wall of worry,” but never a wall of uncertainty.

This information should not be construed by any client or prospective client as the rendering of personalized investment advice.  For more information, please visit BushWealth.com for our full disclosures.

Stacy Bush is with Bush Wealth Management.