March 4 (Reuters) - The U.S. stock market is facing a reckoning with the arrival of President Donald Trump's latest tariffs.
With fresh declines on Tuesday, the benchmark S&P 500 (.SPX), opens new tab ended down about 6% from its February 19 all-time closing high, and is in negative territory for the year. The tech-heavy Nasdaq Composite (.IXIC), opens new tab finished 9.4% below its mid-December closing high, at one point sinking over 10% from that peak.
Tariffs are exacerbating the headache for investors already worried that a series of weakening U.S. economic reports is raising concerns about growth.
The arrival of the tariffs "brings with it uncertainty as far as the earnings of some companies as well as the overall direction of the U.S. economy," said Peter Tuz, president of Chase Investment Counsel.
"I think there was some hope that before they were implemented there would be deals struck with the affected parties and we wouldn’t see them."
Trump's new 25% tariffs on imports from Mexico and Canada took effect on Tuesday, along with a doubling of duties on Chinese goods to 20%.
The levies on foreign imports are widely seen by analysts as likely to increase inflation and to cut into corporate profits.
Tariffs could pose challenges for companies by complicating supply chains or driving costs higher, some of which would be expected to be passed onto consumers in the form of higher prices, investors have said.
Morgan Stanley estimates that 25% tariffs on Mexico and Canada and 10% tariffs on China through 2026 could collectively reduce earnings for the S&P 500 by 5% to 7%, the bank's equity strategists said in a note on Monday.
Nationwide Chief Economist Kathy Bostjancic said in a note that the tariffs could detract at least 1 percentage point from gross domestic product growth and raise inflation by 0.6 percentage points this year, if there are proportionate retaliatory tariffs by the targeted countries and the levies are maintained throughout 2025.
ECONOMIC HEADWINDS
Beyond the levies in focus on Tuesday, Trump recently also floated a reciprocal tariff on European goods. Indeed, European shares retreated from record highs as investors worried about the hit to global growth and whether similar levies could be imposed on Europe.
"Trump’s tit-for-tat approach has heightened fears of a global trade war," said Uto Shinohara, senior investment strategist at Mesirow Currency Management.
With the implementation of tariffs, the multinational companies that are among the biggest weights in the S&P 500 "will pay the price because they will have their profit margins squeezed," said Michael O'Rourke, chief market strategist at JonesTrading.
Meanwhile, 41% of S&P 500 revenue comes from outside the United States, according to Apollo Global Management, suggesting a tariff-induced global slowdown stands to reverberate in the U.S. as well.
Investors are weighing how lasting the tariffs will be and the extent to which the president is using the levies to bargain with trading partners on other issues.
"Trump has raised the stakes in his bargaining position to try to get the upper hand, and it’s up to the other parties to be willing to negotiate more acceptable terms," said Robert Pavlik, senior portfolio manager at Dakota Wealth.
At the same time, "the administration's willingness to enact aggressive tariff actions on two close trade partners could well signal that higher tariffs are likely to follow in other areas," economists at Deutsche Bank said in a note.
The start of the added tariffs comes as a number of recent U.S. economic releases have disappointed or weakened, including consumer confidence, business activity and retail sales.
While stock valuations have moderated somewhat with the latest pullback, the S&P 500 as of Monday was still trading at 21.3 times based on price-to-earnings estimates, well above its long-term average of 15.8, according to LSEG Datastream.
In a sign of investor worry, the Cboe Volatility index (.VIX), on Tuesday was at its highest level since late December.
Equities "are dealing with potential new headwinds," Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, said in a note on Monday.
"While investors, consumers and CEOs prefer predictability, a recent run of weak economic data and falling consumer confidence, alongside policy uncertainty, has caused many to revisit the growth outlook."
Reporting by Lewis Krauskopf, additional reporting by Laura Matthews; Editing by Megan Davies, Jamie Freed, Bill Berkrot and Deepa Babington
