Trump Tariffs: Benefits, Risks and Investment Opportunities
As usual, much of the market “news” is focused on the short-term, and investors are ANGRY with Trump’s “Liberation Day” whereby markets are immediately down big. However, what are the actual benefits, risks and investment opportunities created by the newly announced tariffs? Let’s dig in.
Reciprocal Tariffs:
For starters, here is a look at the newly announced tariffs which are slated to go into effect on April 12th.
While dubbed “reciprocal” tariffs, they’re not based on actual foreign tariffs, but apparently on the U.S. trade deficit (divided by imports) instead.
The Goal:
The goal of the tariffs is to reduce the U.S. goods trade deficit (which exceeded $1 trillion in 2023) by pressuring trade partners into “reciprocal” trade terms. Trump argues foreign nations exploit the US economy through high tariffs, currency manipulation, and value-added taxes, thereby “hollowing out” American manufacturing.
As such, the newly announced tariffs aim to incentivize domestic production (particularly in sectors like autos and manufacturing) in light of statistics that US global output has declined from 28.4% in 2001 to 17.4% in 2023.
By imposing tariffs (i.e. costs on imports) Trump aims to:
Bolster US jobs and national security (through supply chain strength)
Generate revenue—potentially $100 billion from auto tariffs alone—to offset federal deficits or even replace income taxes.
Create a negotiation tool, offering tariff reductions to countries aligning with U.S. economic and security interests.
“Make America Wealthy Again,” which is basically a political talking point to fire up his supporters.
Risks:
Obviously, however, there are big risks to the tariffs. For example:
Higher Prices: Economists warnings suggest an additional $3,000-$3,400 annually per household due to increased costs for goods like cars (up $4,000-$10,000), electronics, and everyday imports.
Retaliation from the European Union and Canada, (already promising countermeasures), could escalate into a global trade war, threatening U.S. exports and millions of jobs—projections indicate over 400,000 job losses with retaliation.
Inflation, already a big concern, could rise by 1.3% or more, with Goldman Sachs now estimating recession odds at 35% within a year (citing disrupted confidence and growth forecasts slashed to 1% for 2025).
Stock Market Volatility: Global markets have reacted with volatility, with stocks tumbling dramatically, and long-term economic stagnation looming if supply chains falter. Critics argue that while some industries may gain, the broader impact could undermine Trump’s industrial revival goals, risking a repeat of historical trade wars like the Smoot-Hawley era (i.e. 1930’s).
Investment Opportunities: US Small Cap Stocks
Trump’s tariffs are likely to benefit U.S. small-cap stocks more than large-cap stocks. Specifically, small-cap stocks (such as ETF ticker: (VB)) derive a higher percentage of revenue (around 80% on average) from within the U.S., whereas large-cap firms in the S&P 500 generate roughly only 60% of revenue from the US. Thereby, tarrifs aimed at reducing imports and boosting domestic production align more closely with small-cap strengths (particularly in manufacturing, construction, and regional services).
For instance, a 25% tariff on automobiles could spur demand for smaller U.S.-based auto parts suppliers or niche manufacturers, many of which are small caps. The tariffs’ emphasis on “re-shoring” could also drive investment into these firms, potentially boosting their valuations.
Historically, during Trump’s 2018 tariffs, the Russell 2000 (small cap stocks) outperformed the S&P 500 (large cap stocks) by about 5% in the six months following the announcement (as domestic firms saw a relative boost).
The large cap outlook, however, is mixed. For example, multinational giants, like Apple (AAPL) , Boeing (BA) and General Motors (GM), rely heavily on global supply chains and export markets. A 10% baseline tariff on imports raises input costs (e.g. semiconductors, raw materials), while reciprocal tariffs from countries like China or the EU could also shrink their overseas sales.
Goldman Sachs has estimates S&P 500 earnings could drop 3-5% if retaliation intensifies (with sectors like tech and industrials hit hardest).
That said, some large caps with strong domestic businesses (such as Walmart (WMT) and steel producers) might see gains from reduced foreign competition (although these benefits could be offset by higher costs and consumer price sensitivity).
Further complicating matters, small caps are often less capitalized (and more debt-reliant) thereby making them more vulnerable to rising interest rates (if inflation spikes—a likely tariff side effect). Whereas large caps, with deeper cash reserves, can better weather economic turbulence. Over time, if global trade shrinks, small caps’ initial gains could erode faster than large caps’ broader resilience.
The Bottom Line:
If you are an investor, you should stay focused on the long-term. Trying to trade the daily news flow is a bit of a fool’s errand (often a costly one!).
You may also want to check your asset allocations (to make sure you are not over exposed to large caps and under exposed to small caps).
The tariffs are ultimately aimed at making the US economy (and the stock market) better. Whether that comes to fruition—time will tell—especially as Trump is only in office for 3.5 more years (and the effects of tariffs will take time as manufacturing cannot change geographies over night, for example).
Despite politics and potential trade wars, the US and global economies are still going to get bigger over time—and the US stock market is eventually going much higher!
Keep right on owing stocks (in a prudent amount for your personal situation) for the long term. I am.