With the S&P 500 (^GSPC) on the brink of a 10% correction, stocks attempted a rebound on Wednesday following a better-than-expected inflation reading.
As with most of the recent market action, the rally proved to be stop-and-go as news that Canada would slap retaliatory tariffs on the US sent the major indexes into negative territory before an eventual rebound throughout the afternoon.
The whipsaw nature of stocks as of late fits what many investors have been saying about the recent drawdown: Until there’s clarity on tariff policy, the chaotic market action likely won’t end.
Guggenheim Partners Investment Management CIO Anne Walsh told Yahoo Finance on Wednesday that the “the on, then off, then on and then off again narrative” surrounding tariffs is driving volatility in the market. And as long as that persists, there likely isn’t a direct path higher for stocks.
“It doesn’t feel like a smooth trajectory [for stocks] because of all of the noise,” Walsh said.
Piper Sandler chief investment strategist Michael Kantrowitz recently offered similar sentiment, writing in a note to clients: “[We’re] unlikely to see a material recovery in equities until we see the start of fiscal policy uncertainty abating,” noting that a recent surge in fiscal policy uncertainty, as measured by an index tracked on Bloomberg and seen below, has coincided with the market’s recent slide.
As JPMorgan Asset Management global strategist Jack Manley told Yahoo Finance recently, the market’s issue with tariffs isn’t the tariffs themselves. If a blanket 25% tariff on Mexico and Canada were signed into action, investors could discount which companies would be impacted, how much their profits would likely fall, and what the fair value would be for those stocks and the market as a whole.
The real issue is that there’s no clarity on the tariffs. Manley pointed out that there’s a “snowball” effect. If the US hits Canada with new duties, the counterparty might respond, as it did on Wednesday. If Canada retaliates, then would the US follow through with even more duties? Does the cycle end there?
These questions, Manley said, make pricing tariffs into the stock market “extremely difficult.”
Tariffs were one reason Goldman Sachs recently downgraded its outlook for the S&P 500 this year. The firm wrote in a note to clients on Tuesday night that it now sees the benchmark index ending 2025 at 6,200, lower than its previously target of 6,500.
Goldman Sachs chief US equity strategist David Kostin wrote that the firm’s lower target reflects its recently reduced GDP growth forecast and a “high assumed tariff rate.” Kostin’s work shows that for every five percentage point increase in tariffs, S&P 500 earnings per share would be reduced by 1% to 2%. The riskiest scenario, in which the effective tariff rate rose to 15%, would shave off an additional 2%.
Given that earnings growth often drives stocks, tariffs weighing on earnings more than currently forecast would likely also hit stock performance more than expected.
To be clear, that is not Kostin’s expected outcome, nor is it what most strategists expect. For now, as Truist Co-CIO Keith Lerner told Yahoo Finance, the market may just need time to “digest and get through some of the more challenging aspects of the current administration’s policies.”
Tariffs may not always be the story investors focus on all year.
“You may start to focus more on tax extensions and deregulation later in the year,” Lerner said, adding,” I can’t pinpoint that exact time.”
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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