Investors didn't take President Donald Trump at his word, and now markets are selling off in reaction to his move to impose hefty tariffs on Canada, Mexico and China.
Nasdaq 100 futures (NQ=F) dove more than 1.7%, leading the declines among the three major indexes but paring losses notched earlier in the morning. S&P 500 futures (ES=F) spiraled roughly 1.5%, and futures attached to the Dow Jones Industrial Average (YM=F) tumbled about 1.3%, or around 580 points.
"While we have not had tariffs baked into our own US equity market outlook, we have been concerned that many financial market participants have been underpricing the risk that they were more than a negotiation tool," RBC Capital Markets head of US equity strategy Lori Calvasina wrote in a note to clients on Sunday.
While Trump has been clear since his first day in office that'd he'd be slapping 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 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 chof360 Finance on Thursday, adding, "for obvious reasons, and that is that it would tank the market."
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.
Now it appears the market consensus was offsides and investors are facing a repricing of potential risks. The US dollar has 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 for the widespread tariffs to not actually hold. The duties on all three countries will be full in force by Tuesday, Feb. 4, and ongoing negotiations between the countries could continue.
But even still, 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.
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"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 Michal 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 David Kostin noted 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 chof360 Finance. Follow him on X @_joshschafer.
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