After Donald Trump won the 2024 presidential election, investors were stoked about “American exceptionalism” — the prospect that the US economy and stock market would trounce just about every other nation’s.
“The US economy is set to outperform other advanced economies next year,” Oxford Economics declared last November. “American exceptionalism will endure.”
“The ‘American exceptionalism’ trade is gaining momentum, driven by the potential return of ‘America First’ policies under Trump 2.0,” Bank of America told its clients in a December report. “The US outlook [is] improving versus other countries, which is also driving US equities higher versus the rest of the world.”
So much for that. US stocks are now laggards as American businesses grapple with Trump’s escalating trade war and other disruptive policies. Since Trump took office on Jan. 20, the S&P 500 stock index has dropped by more than 3%. The FTSE all-world index excluding US stocks has risen by 7%. Stock indexes for Europe, China, Hong Kong, and even Mexico have left the S&P in the dust since Trump began his second term.
The US economy is also showing signs of cracking. Retail spending fell at the start of the year by the largest amount since 2021. Hiring has slowed sharply and claims for unemployment insurance have risen. Consumer confidence has plunged during the last two months, with Americans broadly expecting Trump’s tariffs on imports to make inflation worse. Some forecasts now call for economic growth to decline in the first quarter.
“Trump 2.0’s head-spinning barrage of executive orders, firings, and tariffs have rattled investors, shaken confidence in the economy, and inflamed inflation fears,” Yardeni Research warned on March 5. After Trump imposed 25% tariffs on most imports from Canada and Mexico on March 4, the firm raised its recession odds from 20% to 35%.
The investor outlook now ranges from cautious to gloomy. Bulls such as Tom Lee of Fundstrat think the current downturn is a contained “growth scare” that Trump could end by simply easing up on tariffs, or the Federal Reserve could remediate by resuming the interest rate cuts it paused last December.
Others think Trump is damaging an economy that may not recover easily. In a March 4 analysis, David Rosenberg of Rosenberg Research compared Trump to Herbert Hoover, the hapless president who came into office in 1929 near a stock market peak, then flailed as the Great Depression got underway. “The easy money in equities has been made,” Rosenberg wrote. “Like Herbert Hoover, it may well be the case that Donald Trump got elected right near the peak of the market and economic cycle. The question going forward is just how damaging his economic policies are going to be.”
Trump has a lot of control over that. The tariffs that markets are now rebelling against are arbitrary and, in most economists’ view, counterproductive. The United States imports about $4 trillion worth of goods every year, with Canada, Mexico, and China being the nation’s top three trading partners. Trump has targeted those countries first with the protectionist measures he insists will somehow strengthen the US economy.
President Donald Trump addresses a joint session of Congress on Capitol Hill in Washington, Tuesday, March 4, 2025. (AP Photo/Alex Brandon) ·ASSOCIATED PRESS
In February, Trump levied a 10% tariff on most Chinese imports. He doubled that to 20% in early March. At the same time, he slapped a 25% levy on imports from Canada and Mexico, with the only exception being a 10% levy on Canadian energy products. China and Canada have retaliated with tariffs on imports from the United States, and Mexico says it will do so soon.
Tariffs are a tax on US importers, who normally pass as much of the cost as they can on to their own customers. If the new tariffs stay in place permanently, they’d raise the cost of produce, gasoline, automobiles, and many other things to the tune of $1,200 per year for the typical family, according to the Peterson Institute for International Economics. They’d also raise costs for many companies and therefore lower profits, which is why US stocks have tanked this month. Industries that will face the most turbulence include autos and other manufactured products, construction materials, and agriculture. Retailers, including Target and Best Buy, have already warned that their costs will rise, forcing them to raise prices.
At the start of Trump’s term in January, many investors thought the president would use the threat of tariffs mainly as leverage to get various concessions from trading partners. That now looks like a misread. Trump seems genuinely enthralled with tariffs, plus he views them as a crucial source of federal revenue to help finance tax cuts coming from Congress later this year. In his March 4 speech to Congress, Trump referred to rising prices, falling stocks, and economic tremors as a “little disturbance,” adding, “We’re okay with that.”
Markets are now adjusting to the likelihood that Trump’s tariffs could remain in place and take an ever-growing bite out of the economy. In addition to the tariffs Trump has already enacted, he has threatened additional tariffs on European imports and on any trading partner that taxes US goods more heavily than the US taxes theirs. “It’s a mistake for markets to think Trump might ‘blink' on tariffs,” Terry Haines of Pangaea Policy wrote in a March 4 newsletter. “Trump and his team judge that markets can stand a little extra volatility from tariffs.”
Trump is banking on a large set of tax cuts Congress is likely to pass later this year to jolt markets upward and offset the pain of tariffs. That could happen. But investors know the tax cuts are coming, and for now they’re not convinced they will be a panacea. The world is a turbulent place, and America is no exception.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Bluesky and X: @rickjnewman.
