The S&P 500 (^GSPC -0.23%) has plunged 17% from the record high it reached in February, putting the index deep in market correction territory. The decline was caused by the radical change in U.S. trade policy pushed by President Trump, especially the reciprocal tariffs he announced on April 2.
Importantly, many experts disagree with the Trump administration’s strategy and believe the reciprocal tariffs will have devastating consequences for the U.S. economy. Additionally, history says the stock market could fall much further in the coming months.
Here’s what investors need to know.
Economists tend to disagree with Trump’s fixation on trade deficits and the math behind his reciprocal tariffs
Trump claims the U.S. has for decades been ripped off by the rest of the world due to unfair trade policies. His justification lies in trade deficits. U.S. imports have exceeded exports in every year since 1975. Trump believes trade deficits hurt the economy, and his reciprocal tariffs aim to zero the balance. However, Trump’s opinions “contrast with the views of most economists,” according to the Congressional Research Service.
Additionally, several experts have questioned the math his administration used to calculate the reciprocal tariffs. Trump likened the duties to a tit-for-tat response. “What they charge us, we charge them.” But the Tax Foundation called the math “nonsense” because the so-called reciprocal tariffs were not based on tariffs charged by foreign countries, but instead were calculated based on trade deficits.
Similarly, Dan Ives at Wedbush Securities called the numbers “factually incorrect,” arguing the reciprocal tariffs do not match what other countries charge on U.S. exports. In fact, he said the duties were “so illogical and absurd” that they will be written about by economists and discussed in classrooms for years to come. He also called the tariffs the worst “policy mistake in the last 100 years.”
Image source: Trump-Official White House Photo by Andrea Hanks.
Many economists think Trump’s tariffs will have a devastating impact on the U.S. economy and American households
JPMorgan Chase had an optimistic outlook for the U.S. economy back in December 2024. Strategist Michael Feroli estimated U.S. gross domestic product (GDP) would increase 2% and inflation would slow to 2.4% in 2025. At the time, he estimated the odds of a recession at a mere 20%, but the investment bank has a much darker outlook today.
JPMorgan downwardly revised its economic projections after President Trump unveiled his reciprocal tariffs. Feroli now expects GDP to contract 0.3% while inflation accelerates to 4.3% in 2025. He wrote, “In assessing how the higher-than-expected tariffs will affect growth, we come to the conclusion that we are likely heading into a recession.”
Similarly, Morningstar economist Preston Caldwell increased his recession odds forecast to 40% or 50%. “If they’re maintained, the tariff hikes announced April 2 represent a self-inflicted economic catastrophe for the United States,” he wrote. Caldwell says the tariffs will permanently reduce U.S. economic growth and lower living standards for the average American.
Indeed, the Tax Foundation estimates President Trump’s tariffs will cost the average U.S. household $2,100 in 2025 alone. The nonpartisan group also estimates Americans will pay a cumulative $3.1 trillion over the next decade as companies pass along cost increases to consumers.
History says the stock market may fall further, but the drawdown is ultimately a buying opportunity
President Trump recently said, “What’s going to happen with the market? I can’t tell you. But I can tell you our country has gotten stronger, and eventually it will be a country like no other.” That sounds nice, but the U.S. is already exceptional. America is the biggest and arguably the most innovative economy in the world. I say that because 22 of the 25 largest stocks in the world are U.S. companies.
“Perhaps the most striking aspect of Trump’s dramatic move to reposition the American economy is the timing. The economy he inherited was the envy of the world with growth of 2.8% last year, faster than almost every other major developed economy,” according to The Wall Street Journal. But the Trump administration has undermined that strength in a matter of weeks by pushing radical trade policies.
Indeed, the reciprocal tariffs will raise the average tax on U.S. imports to 25%, according to JPMorgan. That would be the highest level in more than 100 years. And if that abrupt shift in trade policy does drive the U.S. economy to recession, history says the stock market would fall much further. The S&P 500 has declined by an average of 31% during past recessions.
It may seem a small consolation, but there is a silver lining for patient investors. The S&P 500 has eventually recovered from every past correction, and there is no reason to believe this one will be different. That means the current situation is ultimately a good opportunity for investors to buy high-conviction stocks. However, it makes sense to put cash into the market slowly. There is no telling how long the drawdown will last, or how far the stock market will fall.
JPMorgan Chase is an advertising partner of Motley Fool Money. Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.