US trade war causes market volatility but economic outlook remains positive

Over the weekend, US President Donald Trump prepared to impose tariffs on imports from Canada, China and Mexico. With nearly half of all US trade coming from these three regions, the S&P 500 index was modestly down roughly 1.6% in the early hours of trading on Monday, but largely recovered by the end of the day. 

These tariffs mean a US company that imports goods from any of these countries will have to pay an additional tax on top of the original price. The purpose of imposing tariffs is to encourage companies to source alternative suppliers domestically, while also offering the government an additional source of income. But it could also result in the consumer having to cover these increased costs.

Then there’s the issue of a potential trade war as other nations start retaliating by introducing tariffs. This would likely disrupt North American supply chains, particularly cross-border industries such as automobiles and manufacturing.

On Monday, the White House reached an agreement with Canada and Mexico to delay imposing the tariffs by a month, although tariffs on Chinese goods were confirmed on Tuesday. China has already reciprocated, implementing tariffs on an array of goods and commodities from the US including energy supplies and vehicles.  

Our base case is unchanged

Coming into 2025, our outlook on the US was for no recession, contained inflation (albeit above the US Federal Reserve’s 2% target), and strong corporate earnings resulting in positive market performance.

These recent events do not alter this base case.

The US economy showed remarkable resilience over the past couple of years when numerous factors suggested it was heading towards a recession. Should a trade war have a negative impact on the US economy, at least that economy is starting from a strong position – particularly compared to Trump’s first term. Therefore, economic activity is only likely to slow, not contract. 

Fahad Kamal, Chief Investment Officer at Coutts, says: “While tariffs may cause further periods of short-term market volatility, we maintain the view that US economic growth should remain positive. Drivers for this include consumers’ healthy balance sheets and continued positive real wage growth.

“Trade tensions will likely put upward pressure on inflation and downward pressure on economic growth. But economic fundamentals in the US are healthy and better able to withstand trade uncertainty than they otherwise would be.

“We will continue to analyse the impact this could have on supply chains. China, Canada and Mexico are some of the biggest suppliers to the US, and these tariffs will undoubtedly cause bottlenecks.”

Fahad adds, “We believe in focusing on the long term when investing, rather than making any sudden, reactive moves to an evolving situation. Trying to time when to invest in the market could result in missing out on positive gains.”

Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. You should continue to hold cash for your short-term needs.