By Teresa Rivas

Tariffs are proving to be the market's kryptonite once again.

Wall Street seems remarkably unhappy about a policy that it appeared to cheer for months. President Donald Trump made no secret that tariffs would be a cornerstone of his second term, and major indexes rallied both after election night and Inauguration Day.

Yet now that they are a reality -- and Canada, Mexico, and China are retaliating, or poised to do so -- all of those gains have evaporated. The Nasdaq Composite even briefly entered correction territory.

The timing couldn't be worse. The imposition of the levies comes just after Target reported downbeat sales, echoing concern about the health of American shoppers that Walmart highlighted last week. Given the importance of consumer spending for the economy, these factors have overshadowed an otherwise strong earnings season.

It is easy to understand why tariffs are dominating the news cycle: They can upend global trade and increase prices. Stocks slumped at the end of February in response to worries that levies on countries ranging from China to Canada would come to fruition. And their March losses worsened when the president surprised the market by moving ahead with 25% tariffs on Canada and Mexico, plus an additional 10% on China.

"The U.S. cannot avoid the damage from its own tariffs," wrote Rosenberg Research's Dave Rosenberg. "In the absence of fiscal support, a recession now seems likely."

Trade wars were a major reason that the S&P 500 was down in 2018, too. The problem is that tariffs are destructive in a way that no other recent headwinds for stocks are. Warren Buffett called them an inflation-juicing act of war, and their ability to disrupt global supply chains and increase costs can be felt across industries.

While the market has been able to withstand other shocks--even from tech, which had been the rally's main driver--tariffs and other trade restrictions are so encompassing and open-ended that they have nearly always soured investor sentiment.

That is even to the point of overshadowing strong profits, as happened to Nvidia, the market's darling since the artificial-intelligence rally began in late 2022. The stock has fallen even though the chip maker reported great results last week.

Blame worries about trade tensions and the possibility of further specific limits on chip exports to China. Barron's warned in December that stocks might stall after Inauguration Day, when the rubber met the road.

The impact on tech has been most pronounced. The damage looks all the worse given how strong the sector has been in recent years.

Little wonder, then, that even people who are upbeat about the outlook are getting picky. BMO Capital Markets' Brian Belski believes that between diverging performance and pricey valuations, tech now "warrants an active approach for the sector, a departure from the passive-dominated trends that investors have become accustomed to for Technology since this bull market began in late 2022."

Recent woes haven't totally soured him on the sector, but he says it will be harder to invest profitably now. He favors names outside of the Magnificent Seven that he says offer growth at a reasonable price. A recent screen for such stocks turned up names such as Advanced Micro Devices, Dell Technologies, First Solar, Intel, On Semiconductor, Teradyne, Western Digital, and Workday.

Jitters are running high in other sectors, too. "Given the slower start to the economy this year along with tariffs, investors have been very concerned about earnings and revenue growth," wrote Jefferies equity etrategist Steven DeSanctis in a research note Monday.

He said a close look at profit reports for the fourth quarter, and how analysts responded to them, offered reasons for optimism. Analysts' cuts to their forecasts for profit growth in 2025 "are not bigger than what we have seen over the last few years," DeSanctis wrote.

The quarterly numbers were strong overall. All sectors delivered better-than-expected results for the first time in six quarters. Year-over-year growth in earnings per share was robust at 14.6%, led by tech, financial and health care.

"[T]his was the best print since 2021," Venu Krishma, head of U.S. equity strategy at Barclays, wrote on Tuesday.

But it just doesn't seem to matter as long as tariffs--present and potentially future--are dominating the news. Investors understandably think that current projections for profits and margins might not hold up as trade wars lead to increased costs for companies and consumers.

Of course, there's always the possibility that Trump could see the losses in stocks as a signal that he should be more deliberate in his effort to reshape world trade.

"Trump considered equities a public-opinion poll in the past," noted 22V Research's Dennis DeBusschere, though it's "impossible to predict what decline triggers a pullback on tariffs," other than that the level is likely lower than the market is now. "It might take a very weak payroll report AND a sharp decline in equities to force a change in policy."

At least we're nearly halfway there. The employment numbers for February are due on Friday.

Write to Teresa Rivas at teresa.rivas@barrons.com

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March 04, 2025 18:07 ET (23:07 GMT)

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