The S&P 500 Index landed in correction territory after a swift three-week drop of more than 10% from its February 19 record high. The NASDAQ index suffered an official correction a week earlier, having fallen over several months from its most recent peak in December 2024.1

President Trump’s rapid, on-and-off implementation of tariffs and the escalating trade war it sparked unsettled the financial markets. Meanwhile, the U.S. economy, which had appeared to be pulling off a soft landing, began to flash warning signs.2

Tariffs taking effect

A tariff is a tax on imported goods that is used to help protect domestic industries from foreign competition, raise revenue, or as a tool in trade negotiations. Tariffs are a key component of the president’s trademark America First policy, as they are intended to incentivize businesses to produce goods in the United States.

New 20% tariffs on imported goods from China (now totaling about 30%) have already taken effect, along with a 25% tariff on all imported steel and aluminum. Threatened 25% tariffs on imports from Mexico and Canada were paused until April, which is when a round of reciprocal tariffs on specific U.S. trading partners could be announced.3

Canada and the European Union (EU) have responded with reciprocal tariffs on specific U.S. products, and Canadian shoppers are boycotting American-made goods.4 China imposed a retaliatory tariff of 15% on chicken, wheat, and corn and 10% on soybeans, pork, beef, and fruit, which could potentially cost U.S. farmers billions of dollars in reduced agricultural exports.5

Inflation and growth fears

If U.S. companies must pay a 25% tariff on imported goods, their actual costs may not increase by the full 25%, because a foreign exporter might lower its prices to remain competitive. Still, it could cost substantially more for U.S. manufacturers to buy widely used commodities (such as metal or lumber). The price of domestic supplies could rise as well due to less foreign competition, as would the price of products that are made in the United States from those materials.

By one estimate, the price of a new car sold in a U.S. showroom could rise by a startling $4,000 to $10,000 if threatened tariffs on Canada and Mexico take effect as scheduled.6 The National Association of Home Builders reported that tariffs could increase the cost to build a typical new home by $9,200.7

In the worst-case scenario, significant inflation could hurt consumers, reduce sales, squeeze corporate profits, and result in job losses, especially in industries that depend heavily on imports. The rising possibility of tariff-driven inflation is just one reason that some economists have started to downgrade their forecasts for economic growth.8

More cautious consumers

Measured by the Consumer Price Index, inflation slowed to 2.8% over the 12 months ending in February 2025.9 It could take time for tariff-driven price increases to show up on price tags and even longer before it would be evident in official inflation reports. Even so, the closely watched University of Michigan survey found that consumer sentiment fell sharply in March and participants expected inflation to run at 3.9% over the next five to 10 years, the highest reading in more than 30 years. This sudden decline in confidence coincided with a barrage of news about tariff actions and layoffs at federal agencies.10

Retailers, airlines, and restaurants have reported seeing a noticeable decrease in consumer demand. It appears that consumers have started to pull back, and some could be tapped out after enduring several years of higher prices. Consumer spending accounts for two-thirds of gross domestic product, so if a significant slowdown materializes, it could put the brakes on economic growth.11

Businesses under pressure

For several decades, much of the world — including the United States — supported free trade and globalization. Many companies manufacture products in other countries and/or source raw materials or components from all over the world. Reshaping complex supply chains isn’t likely to be a quick or painless task.

Some tariff threats may be dropped through negotiations, so it’s unknown which tariffs will stick for the long-term. Uncertainty may cause many businesses to hold off on capital investments and/or hiring plans until they have more clarity on tariff policies and the direction of the economy.12 Tariff-related costs that can’t be passed on to customers could cut into the earnings of publicly traded companies in upcoming quarters, a prospect that has likely triggered some of the recent market volatility.13

What’s an investor to do?

It’s natural to be concerned when the market drops, but it may help to keep in mind that investors have also benefitted from two years of extraordinary gains. Stocks on the S&P 500 Index provided a total return of 25% in 2024 and 26% in 2023.14

Stocks regained some losses in the days following the correction, but prices could continue to fluctuate while investors digest the potential impacts of shifting trade policies. Expecting volatility and maintaining a long-term perspective may help you avoid making snap decisions that could derail your investment strategy.

The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. The S&P 500 Index is an unmanaged group of securities that is considered representative of the U.S. stock market in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results. Actual results will vary.

1–2) The Wall Street Journal, March 17, 2025

3) Yahoo Finance, March 17, 2025

4) Business Insider, March 14, 2025

5) CNBC.com, March 12, 2025

6) The New York Times, March 14, 2025

7) National Association of Home Builders, March 17, 2025

8, 12) The San Diego Union-Tribune, March 13, 2025

9) U.S. Bureau of Labor Statistics, 2025

10) Yahoo Finance, March 14, 2025

11) CBSNews.com, March 17, 2025

13) Barron’s, March 17, 2025

14) Dow Jones Indices, 2025