Investors didn’t take President Donald Trump at his word, sparking an early market sell-off in reaction to his move to impose hefty tariffs on Canada, Mexico, and China.
In early trading all three of the major averages sank before recovering some losses after the White House confirmed tariffs on Mexico will be delayed.
The tech-heavy Nasdaq Composite (^IXIC) was down about 1%, while the S&P 500 (^GSPC) fell about 0.8%. Meanwhile, the Dow Jones Industrial Average (^DJI) shed 0.4%, or nearly 200 points.
The jerky market action in relation to whether or not Trump will fully follow through on his tariff plans reflects what RBC Capital Markets head of US equity strategy Lori Calvasina described as investors “underpricing the risk that [tariffs] were more than a negotiation tool.”
While Trump has been clear since his first day in office that he would slap 25% tariffs on both Canada and Mexico, markets and economists appeared not to take the president at face value. The White House also said Friday that the administration planned to enact a 10% tariff on China.
“My sense is tariffs are coming, but I don’t think they’ll be quite on the same scale that the president has talked about,” Capital Economics Group chief economist Neil Shearing told Yahoo Finance on Thursday, adding, “for obvious reasons, and that is that it would tank the market.”
Read more: What are tariffs, and how do they affect you?
Even betting markets, which many believe were a leading indicator during the recent presidential election, weren’t pricing in high odds of tariffs. 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.
Early Monday, it appears markets were caught offsides and investors were facing a repricing of potential risks. The US dollar shot up to 109, near its highest level in two years. Retail and auto stocks that could be impacted by tariffs also sold off.
“Full implemented tariffs with staying power don’t appear to be in the price of key markets,” a team of Morgan Stanley equity strategists and economists wrote on Sunday.
They added, “US equities may come under pressure, and services should outperform consumer goods.”
To be clear, there is still a path in which the widespread tariffs do not hold. The duties on all three countries will be fully in force by Tuesday, Feb. 4, and ongoing negotiations, like the ones cited between the US and Mexico, could continue with other parties as well.
Even so, the weekend tariff surprise for markets could be an early insight into the state of markets over the near-term as investors keep attempting to decipher Trump’s trade policy.
“Even if tariffs are called off [Monday], the increase in policy uncertainty will be hard to put back in the bottle,” JPMorgan chief US economist Michael Feroli wrote in a note to clients on Sunday. “For the Fed, the weekend’s developments will likely reinforce their inclination to sit on the sidelines and to remain below the radar as much as possible.”
In a Sunday note to clients, Goldman Sachs chief US equity strategist David Kostin noted that the tariff announcements have come “as a shock to many investors who expected tariffs would only be imposed if trade negotiations failed.”
Kostin added that large tariffs pose “downside risk” to his team’s S&P 500 earnings forecast. Combined with increased policy uncertainty, Kostin argued the S&P 500’s fair value could see near-term downside of roughly 5% if the market prices “sustained implementation of the newly-announced tariffs.”
To Kostin, the key for markets remains whether or not investors truly believe the tariffs will be implemented for an extended period of time.
“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.”
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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