Deep Dive: How Tariffs Affect Stock Markets — Trade Policy, Supply Chains, and Your Portfolio

A tariff is a tax imposed by a government on goods imported from other countries. When a U.S. company imports steel from China, a 25% tariff means the importer pays 25% of the goods' declared value to U.S. Customs. This cost is borne by the importing company — not by the exporting country — which is a critical distinction many investors miss.

Governments impose tariffs for several reasons. Protectionism shields domestic industries from cheaper foreign competition — steel and aluminum tariffs, for example, aim to keep American mills competitive. Revenue generation was historically the primary purpose; U.S. tariff revenues soared to $240 billion in 2025, creating a significant fiscal windfall. Retaliation and negotiation use tariffs as leverage to force trade concessions. And national security justifications under Section 232 of the Trade Expansion Act of 1962 allow tariffs on products deemed essential to defense — a provision that now covers autos, semiconductors, pharmaceuticals, and furniture.

For investors, the key insight is that tariffs function as a tax on the supply chain. They increase input costs for manufacturers, compress margins for importers, raise prices for consumers, and trigger retaliatory tariffs that hurt exporters. Every link in the chain feels the impact differently, which is why tariff announcements create such divergent stock movements across sectors.

When a tariff is imposed, its effects cascade through the economy in a predictable sequence that investors can track.

Stage 1 — Import front-running. When tariffs are announced but not yet effective, importers rush to stockpile goods before higher costs hit. This is exactly what happened in early 2025: the U.S. goods trade deficit exploded to -$128.3 billion in January and -$136.0 billion in March as companies pre-loaded inventory ahead of Liberation Day tariffs. For investors, this creates a temporary earnings boost for logistics companies and importers, followed by a hangover as excess inventory is worked off.

Stage 2 — Margin compression. Companies absorb some tariff costs to remain competitive, squeezing profit margins. General Motors now expects $3-4 billion in tariff costs for 2026, while Ford projects roughly $2 billion. Companies with strong pricing power (luxury brands, monopolies) can pass costs through; those in competitive markets (retail, consumer packaged goods) often cannot.

Stage 3 — Supply chain restructuring. Over months and years, companies shift sourcing to avoid tariffed countries. Asian producers in Thailand and Vietnam benefited as importers diverted away from China. But China adapted too — its IT hardware exports surged on the back of AI infrastructure demand, and Beijing deepened trade ties with emerging markets in Africa and with allies like Canada.

Stage 4 — Consumer price impact. Ultimately, tariffs contribute to inflation, though the pass-through is typically partial and delayed. The CPI rose from 319.7 in February 2025 to 326.6 in January 2026, a 2.2% increase over eleven months. The muted inflation impact partly reflects importers absorbing costs and the Fed's rate-cutting cycle — from 4.33% in August 2025 to 3.64% in January 2026 — which offset some of the tariff drag on growth.

Tariffs do not affect all stocks equally. Understanding sector-specific exposure is the key to positioning a portfolio around trade policy shifts.

Import-dependent consumer companies face the most pressure. Retailers and consumer brands with global supply chains suffer the most direct margin compression. Nike (NKE), currently trading at $65.40 with a P/E of 38.25, manufactures virtually all of its footwear in Vietnam, Indonesia, and China — countries at the center of tariff disputes. Its $96.6 billion market cap reflects a stock that has ranged from $52.28 to $82.44 over the past year, with tariff headlines driving much of that volatility. Walmart (WMT) at $122.99 with a P/E of 45.05 imports heavily across categories; its massive $980.6 billion market cap gives it scale to negotiate, but tariffs on everything from furniture to food packaging still compress margins.

Aerospace and defense exporters face a double threat. Boeing (BA) at $232.03 contends with tariffs on imported components that raise manufacturing costs, while retaliatory tariffs from other countries directly hit aircraft exports. Its P/E of 93.56 already reflects operational challenges, and its $182.2 billion valuation leaves little room for additional trade headwinds. The 25% auto tariffs similarly punish global automakers with cross-border supply chains — GM expects $3-4 billion in tariff costs for 2026.

Aluminum-intensive companies face permanently higher packaging costs. With aluminum tariffs at 50%, companies like Coca-Cola, PepsiCo, and Keurig Dr Pepper pay more for every can and bottle they produce. Reynolds, the maker of aluminum foil and wrap, is particularly exposed.

Domestic producers benefit from tariff walls. U.S. steel mills, domestic furniture manufacturers, and American-sourced agriculture gain when foreign competitors face 25-50% tariffs. These companies can raise prices under tariff protection while their cost base remains unchanged. Supply chain intermediaries — logistics firms that help companies restructure sourcing — also see increased demand during tariff transitions.

Tariffs don't operate in isolation — they trigger a chain of macroeconomic responses that amplify their market impact.

The dollar effect. Tariffs tend to strengthen the domestic currency in the short term. When the U.S. imposes tariffs, reduced imports mean less demand for foreign currencies, pushing the dollar higher. The U.S. Dollar Trade Weighted Index held firm around 117-118 through early 2026, reflecting ongoing tariff support. A stronger dollar hurts U.S. exporters (their goods become more expensive abroad) and reduces the dollar value of overseas earnings — a headwind for multinationals like Nike and Boeing that derive significant revenue internationally.

The interest rate response. Tariff uncertainty slows economic activity, which pressures central banks to cut rates. The Federal Reserve reduced the federal funds rate from 4.33% (where it held for six months through August 2025) to 3.64% by January 2026 — a 69-basis-point cut in five months. Lower rates support stock valuations by reducing the discount rate on future earnings, partially offsetting the negative earnings impact of tariffs themselves. The 10-year Treasury yield has tracked down to around 4.08%, reflecting both the rate cuts and growth concerns.

The inflation tension. Tariffs push prices up while slowing growth — a mild stagflationary force. The CPI rose from 319.7 to 326.6 over the past year, but the rate of increase has been modest partly because companies absorbed tariff costs instead of passing them through fully. Investors must weigh whether the Fed's rate cuts will be sufficient to sustain growth without letting tariff-driven inflation reaccelerate — a balancing act that will define monetary policy throughout 2026.

The past year offers a masterclass in how tariff policy moves markets, with lessons investors can apply to future trade disputes.

April 2025 — Liberation Day. Trump unveiled country-specific "reciprocal" tariffs under IEEPA, sending the average tariff rate on imports to roughly 15%. Markets sold off sharply as companies scrambled to assess the damage. Import-heavy retailers and automakers bore the brunt, while domestic producers rallied.

Mid-2025 — Negotiation and adaptation. Countries struck bilateral deals to reduce their rates: the UK and Japan negotiated auto tariffs down to 10-15%. Companies accelerated supply chain diversification, with Vietnam and Thailand emerging as primary beneficiaries. Despite the disruption, global trade volumes actually outpaced world economic growth in 2025 — a testament to how quickly supply chains can adapt.

Late 2025 — Section 232 expansion. The administration broadened national security tariffs to cover furniture (25%, rising to 50% in 2027), maintained 50% aluminum duties, and opened a Section 232 investigation into pharmaceuticals with threats of tariffs up to 250%. Drugmakers including Merck and Bristol Myers Squibb struck deals to lower prices and invest in U.S. manufacturing in exchange for a three-year tariff exemption.

February 20, 2026 — Supreme Court strikes down IEEPA tariffs. In a 6-3 decision, the Court ruled that IEEPA "does not authorize the President to impose tariffs." This theoretically halved the average tariff rate from 15% to above 6% — still triple the pre-2025 baseline of about 2%. Hours later, Trump announced a new global 10% tariff, signaling that trade policy uncertainty would persist.

The investment lesson: Markets had already partially priced in tariff risks over the preceding year. The Supreme Court ruling triggered relief in import-dependent stocks, but the immediate new tariff announcement demonstrated that trade policy operates as a continuous risk factor, not a one-time event. Companies that had diversified supply chains and built pricing power weathered the volatility far better than those that hadn't.

Trade policy will remain a market-moving force throughout 2026 and beyond. Here is how to evaluate tariff risk in your portfolio.

Map your supply chain exposure. For every stock you own, understand where the company sources its inputs and sells its products. Companies with diversified, multi-country supply chains are more resilient than those concentrated in tariffed regions. Nike's near-total reliance on Asian manufacturing makes it a tariff barometer; Walmart's massive scale gives it negotiating leverage but exposes it across every import category.

Watch the trade balance and import data. Sharp moves in the goods trade balance — like the swing from -$136 billion in March 2025 to -$28.7 billion in October — signal how tariffs are reshaping trade flows in real time. Rising deficits after tariff announcements suggest front-running; falling deficits suggest tariffs are biting.

Monitor the Fed's response. Tariff-driven economic slowdowns typically trigger rate cuts, which support equity valuations. The 69-basis-point cutting cycle from August 2025 to January 2026 directly supported stock prices even as tariffs weighed on earnings. If tariff escalation accelerates, expect more dovish Fed language — a potential offset for equity investors.

Distinguish between Section 232 and IEEPA tariffs. The Supreme Court ruling only invalidated IEEPA tariffs. Section 232 tariffs on steel, aluminum, autos, semiconductors, and potentially pharmaceuticals remain in force and could be expanded. These sector-specific tariffs are the durable trade policy risk that investors should focus on.

Look for pricing power. Companies that can pass through tariff costs — luxury brands, essential-service providers, companies with strong brand loyalty — will outperform those in commoditized, price-sensitive markets. Margin resilience during tariff periods is a quality signal that compounds over time.