What tariffs could mean for the economy, markets and investors

Anthony Saglimbene, Chief Market Strategist – Ameriprise Financial

Russell Price, Chief Economist – Ameriprise Financial

April 7, 2025

Last week, President Trump announced sweeping reciprocal tariffs, targeting over 180 countries. These changes were in addition to previously announced tariffs in February and March. A new 10% universal tariff rate will be imposed on all U.S. imports from other countries. However, several key U.S. trading partners will face levies that are multiples of that figure.

Markets have responded strongly to the administration’s announcement, leaving many investors uncertain about the potential impact on their portfolios. When there’s stress in the markets, your financial advisor can help you stay focused on your long-term goals and answer any questions about your risk tolerance and diversifying your portfolio.

A closer look at potential economic impacts

The recently announced reciprocal tariff actions from President Trump were much more comprehensive and widespread than expected, but they included significant carve-outs that the market might not fully appreciate. In our view, the exclusion of U.S. – Mexico – Canada Agreement (USMCA)-covered products, pharmaceuticals, semiconductors and lumber, should reduce the negative growth and inflation consequences of the tariffs. Overall, these exemptions make the tariffs relatively more economically palatable than current headlines may suggest. Nonetheless, these policies will be very difficult for global economies to digest.

The negative impact on real U.S. Gross Domestic Product (GDP) could be approximately $250 to $500 billion, or about 0.7% to 1.5%, assuming the tariffs are fully implemented for an entire year. Separately, we believe the tariffs could put upward pressure on the Consumer Price Index (i.e., inflation) of approximately +0.8% to +1.4%. At this time, our calculations do not include any potential reductions in foreign demand for U.S.-made goods or retaliatory tariffs from other countries that may come.

Alternatively, near-term trade turmoil could also pressure the value of the U.S. dollar, which chould make U.S.-made goods and farm products more attractive in global markets. Further, since imports are a direct subtraction from GDP calculations, lower trade deficits could have a modestly positive, offsetting influence.

Bottom line: We believe the U.S. economy stands on firm fundamentals, most notably solid consumer and corporate balance sheets. Such conditions bode well for longer-term economic prospects and offer offsetting support to conditions even as tariffs entice material headwinds over the intermediate-term.

All else remaining equal, we do not see a recession to be the most likely path forward. Extreme tariff policies could be strong enough to pull the economy into a short, shallow downturn. However, we do not believe this to be likely at this time.

Market uncertainty rises to pandemic levels

Rising global recession fears, potential bouts of higher inflation and elevated concerns about unintended consequences of White House policies have increased uncertainty to levels not seen since the pandemic. The S&P 500 Index has corrected more than 15% from its recent high. Similarily, the NASDAQ Composite and Russell 2000 Index have each fallen into a bear market, down more than 20% from their high-water marks.

There is a fear that stocks could move lower, particularly if this growth scare turns into a recession. But we believe we are approaching levels that historically have provided buying opportunities for investors with longer time horizons willing to withstand the market volatility and uncertainty.

However, there is a growing risk that S&P 500 companies could lower profit guidance and provide weaker outlooks during the Q1 earnings season. This would likely cause analysts to lower their earnings estimates for the second quarter and possibly beyond. Recent stock negativity is partly a function of investors getting ahead of this potential reality. That said, further reductions in earnings expectations would likely continue to weigh on stock prices, in our view.

Investors see the importance of diversification

Investors’ diversification in bonds, gold, and several types of alternative strategies are helping lower portfolio volatility and mitigate equity declines. Times like this remind investors the benefits of diversifying their portfolio. In our view, investing takes discipline, patience and an understanding that market and economic conditions move through good times and bad times.

Staying invested continuously generally outperforms trying to time the market. Missing the best days in performance, which often cluster around the worst days in performance, can have dramatically negative effects on long-term returns. Notably, there have been many times in history when stocks experienced significant drawdowns mid-year (similar to now) and still finished the year higher, particularly when recessions were avoided.

Bottom line: The new tariffs will almost certainly complicate global trade with the U.S., and prices are likely to rise over time, depending on how lasting these new tariffs prove to be. Moving forward, incoming economic data and commentary from corporate America on upcoming earnings calls will carry added weight as investors attempt to sort through immediate/longer-term tariff impacts across industries and global economies.

Avoid reactionary responses to market stress and maintain portfolio diversification. While stocks could see more volatility ahead, government bonds and alternative investments could help reduce equity volatility and mitigate portfolio stress. 

Stay invested amid market ups and downs

During periods of market uncertainty, your Ameriprise financial advisor is here to help. They can review your portfolio to help you assess your risk tolerance and stay focused on your long-term investment strategy.