Staff Reporter

Investors are on edge as looming tariffs threaten to impact U.S. corporate profits and heighten inflationary pressures. Market analysts suggest that current valuations may not fully account for the risks associated with potential increases in tariffs on foreign imports.

President Donald Trump has announced plans to impose tariffs starting this Saturday on Canada, Mexico, and China—America’s three largest trading partners. As the deadline approaches, investors are keenly assessing whether these proposed duties are genuine or merely a bargaining chip in ongoing negotiations.

“It’s introducing significant volatility to market expectations due to the daily shifts in rhetoric,” commented Leo Harmon, Chief Investment Officer at Mesirow Equity Management. He anticipates that some level of tariffs will be enacted, with market reactions hinging on the magnitude of the duties.

“If the tariffs exceed market expectations, we could see a temporary ‘risk-off’ sentiment in the market,” Harmon noted.

Trump’s Saturday deadline includes a proposed 25% tariff on imports from Mexico and Canada, contingent upon those nations taking action to curb illegal immigration and the flow of fentanyl into the U.S. He has also threatened a 10% tariff on Chinese goods, citing that country’s involvement in the fentanyl trade.

On Friday, President Trump stated that nothing could prevent the upcoming tariffs from being implemented by Canada, Mexico, and China, although he mentioned a possible exemption for Canadian oil.

Barclays strategists predict that these tariffs could dampen S&P 500 company earnings by 2.8%, factoring in potential retaliatory actions from the affected countries.

“Global supply chains will need to be restructured or reconsidered,” said Matthew Miskin, Co-Chief Investment Strategist at John Hancock Investment Management. “This shift could lead to increased cost structures for companies.”

According to LPL Research analysts, some of these tariffs will inevitably be passed on to consumers as higher prices. Goldman Sachs economists estimate that broad tariffs on Canada and Mexico could result in a 0.7% rise in core inflation and a 0.4% decrease in gross domestic product (GDP).

The prospect of rising consumer prices is a critical concern for investors, who fear that a resurgence in inflation could prompt the Federal Reserve to halt its interest rate cuts. This week, the U.S. central bank paused its rate-cutting cycle, with Fed Chair Jerome Powell indicating that officials are “waiting to see what policies are enacted” under the new administration.

Gene Goldman, Chief Investment Officer at Cetera Financial Group, warned of potential weakness in equity markets if Trump follows through with the tariffs this weekend. “High valuations combined with the inflationary impact of tariffs and their effect on Fed policy could lead to a sell-off in stocks,” Goldman stated.

Jim Smigiel, Chief Investment Officer at SEI, noted that markets might start to consider the possibility of interest rate hikes if tariffs trigger inflation. “The likelihood of a rate increase has crept into investors’ minds,” Smigiel added.

With the S&P 500 hovering near all-time highs, market analysts at Evercore ISI predict the index could swing 3% to 5% in either direction in the short term, depending on President Trump’s upcoming tariff announcements.

Colin Graham, Head of Multi-Asset Strategies at Robeco in London, revealed that the firm is considering closing its position in long-duration Treasuries before the weekend. “This is one of those significant geopolitical events that are unpredictable,” Graham stated. “They occur suddenly, and then you have to determine your next steps.”

Some analysts on Wall Street believe the proposed tariffs may be more of a negotiating tactic than a firm policy. Investors had anticipated swift action from Trump to implement tariffs following his second term inauguration on January 20.

The absence of immediate tariffs has provided some relief to the markets, as these measures are typically viewed as among the more detrimental policies for stocks, counteracting the anticipated benefits of Trump’s pro-growth agenda, which includes reduced taxes and regulations.

Philipp Carlsson-Szlezak, BCG Global Chief Economist, commented that 25% tariffs on Canada and Mexico “would be a jolt.” However, he also noted, “it would at least clarify how the administration intends to approach tariffs moving forward.”