How a Global Trade War Hurts the U.S. Stock Market

The Trump administration recently imposed tariffs on virtually every country in the world, leading to massive stock market declines, and then paused many of those tariffs, leading to a rebound in the markets. The threat of a global tariff trade war, where countries impose taxes on each other’s imports in a tit-for-tat fashion, is sending shockwaves through financial markets. For the U.S. stock market, which thrives on economic stability, predictable trade flows and global growth, the effects of a trade war can be swift and severe. Here’s how.

1. Rising Costs for U.S. Companies

When tariffs are imposed on imported goods — whether raw materials like steel and aluminum or finished goods like electronics — U.S. companies often face higher input costs. For instance, American manufacturers that rely on foreign components must pay more to produce their goods. These higher costs can compress profit margins unless passed on to consumers, which is not always feasible in competitive markets.

This is particularly damaging to companies in the S&P 500, many of which operate in global supply chains. For example, automakers and tech firms often assemble products using parts sourced from multiple countries. Tariffs disrupt this model, adding cost and complexity.

2. Retaliation Hurts Exports

Tariffs don’t exist in a vacuum. When the U.S. imposes tariffs, trading partners often retaliate with tariffs on American goods. This directly affects U.S. exporters, from soybean farmers to airplane manufacturers. With higher prices abroad, American products become less competitive, leading to reduced sales and revenue for affected companies.

This drop in exports can especially hurt large multinational corporations — many of which are publicly traded and constitute a significant share of the U.S. stock market. Sectors like agriculture, industrials and consumer goods are often hit the hardest.

3. Uncertainty and Volatility

Markets dislike uncertainty, and trade wars generate a lot of it. When businesses and investors are unsure about future trade policy, they hold back on investment and hiring. This cautious behavior slows economic growth, which in turn affects earnings expectations for public companies.

Stock market volatility often increases during trade wars, with investors reacting to the latest tariff announcements, retaliatory measures and political statements. This uncertainty can lead to sharp swings in equity prices, such as those we are seeing now.

4. Slowing Global Growth

The U.S. economy is deeply integrated into the global economy. When global trade slows due to tariffs, overall economic growth tends to suffer. A slowdown in China, the European Union or other key markets can reduce demand for U.S. goods and services. Slower growth abroad means fewer sales opportunities for American companies, which drags down stock prices.

5. Shifting Investor Sentiment

A trade war often prompts investors to rotate out of stocks into safer assets like bonds or gold. This “risk-off” sentiment can cause broader market declines, especially in cyclical sectors like technology, energy and industrials, which are more sensitive to global trade.

For individual investors, such times are challenging. Younger investors who are far from retirement most likely should stay the course and weather this storm. But older investors who are closer to retirement should consider their portfolio mix and seek advice from a financial advisor to ensure that their portfolio is structured to provide them with adequate retirement income.

Richard Warr is associate dean for faculty and research, and professor of finance in the Poole College of Management at NC State.