US President Donald Trump’s announcement of sweeping tariffs on imports sent investors reeling in April 2025, with American stock markets losing a record-setting $6.6 trillion in value over just two days. The Dow and S&P 500 each lost more than 9 % on the first two trading days after Trump set out his “Liberation Day” plans, with indices around the world following suit.
But, by early May, the panic had given way to renewed confidence, and the S&P 500 recorded its longest winning streak since 2004. This set the stage for a third consecutive year of strong equity returns, with the S&P 500 and MSCI World respectively delivering gains of around 17.9% and 21.1% in US dollars. While there was volatility along the way, it was a far better performance than most investors and analysts had expected back in April.
As we move into a new year, it is worth untangling why the impact of Trump’s tariffs was more muted than expected. Given that “tariff” remains among the US President’s favourite words, the theme is likely to be as prominent in 2026 as it was in 2025. We will also explore some of the scenarios that investors should look out for as Trump continues to reshape the US’s relationships with its trading partners.
One significant reason that the tariff shock was smaller than expected is that the tariffs Trump has actually introduced are not as extreme as those that he vowed to impose. The Trump administration has walked back or never introduced tariffs on a range of strategic products and commodities, including smartphones, certain medical products, semiconductors, agriproducts like coffee and beef, gas, coal, and petroleum.
An opening gambit in the trade war
Furthermore, as some analysts speculated, it appears that the Liberation Day announcement was the opening move in an aggressive attempt to secure better terms with America’s major partner nations. The UK, Japan, and South Korea, for example, renegotiated their trading relationships with the US, enabling them to bypass or reduce the tariffs that Trump had threatened to impose.
China was one of the few trading partners to push back hard against Trump’s tariffs. The country successfully used its dominance of rare earths mining and processing as leverage to persuade Trump to water down his tariff plans. Given that China remains one of America’s major import partners, a truce between the nations mitigated against the fruition of the worst-case scenario.
What’s more, the US economy proved resilient in 2025, and company earnings, thanks in large part to Big Tech, remained buoyant. While some poorer and middle-class consumers took strain, upper-middle class households still had money to spend. Wealthier consumers, who account for a rising share of spending, remained relatively insulated from higher prices. Additionally, lower interest rates, a fall in the value of the dollar, stable oil prices, and improving cost efficiencies within the corporate sector all helped to cushion the tariff blow and bolster equities.
An economic reckoning may still lie ahead
As we look to 2026, investors should not take for granted that the impact of tariffs will remain as subdued as in 2025. Although the tariffs are less drastic than initially feared, overall tariffs in the US are at their highest level in years. Many economists identify the tariff regime as one of the reasons US inflation remains above target, even if the effect has been uneven and partially delayed.
This year, we may start to see the impact of tariffs feeding through to the US economy. US GDP climbed 4.3% year-on-year in the third quarter of 2025. But GDP growth was arguably artificially high because imports (which are subtracted from GDP), were lower than usual. This might be explained by companies previously stockpiling inventory ahead of tariffs to preserve margins without increasing prices.
It remains to be seen if companies will be able to continue absorbing higher costs without passing them on to consumers. Margin pressure is rising, particularly in manufacturing, retail, and transport-intensive sectors. Business confidence surveys in the US point to delayed investment, deferred hiring decisions, and greater caution around capital expenditure.
Research from the Federal Reserve Bank of San Francisco finds that tariffs do not necessarily translate into a sharp or lasting inflation, but are associated with higher unemployment and slower economic growth. We could see a weaker job market and slower growth start to weigh on some companies’ earnings this year. A recent decline in US manufacturing jobs, despite Trump’s goal of reshoring production, underscores these risks.
Uncertainty and more uncertainty
Trade and tariff uncertainty is not going to recede in the near future, which may be a drag on business investment, consumer spending, and the job market. Major negotiations between the US and Mexico, Canada, and China are expected to dominate trade headlines throughout the year. Investors should brace for volatility, with policy risks that are difficult to price with confidence.
Another variable is a case in which the US Supreme Court will rule on the legality of certain tariffs that Trump has introduced. An adverse ruling could force the government to refund some tariffs to businesses. But the administration has indicated that it is determined to find other routes to impose tariffs even if the Court rules against it. An affirmation of the administration’s authority to impose tariffs would reduce legal uncertainty but signal that protectionism is here to stay.
Institutions such as the IMF have revised global growth forecasts for 2026 slightly downwards, with tariffs cited as a contributing factor. They argue that even if the shock was smaller than initially feared, it was sufficient to drag global expansion below its pre-pandemic trend. Slower trade growth, fragmented supply chains, and reduced investment efficiency will all weigh on the world economy.
Corporate earnings and interest rates will be key signals for investors to watch as the year unfolds. Earnings will reveal whether firms can sustain profitability as tariff costs work through supply chains. Central bank policy, particularly in the US, will indicate how well officials can balance tariff-related price pressures against slowing growth and labour market weakness. Markets weathered the tariff storm very well in 2025, but 2026 will test whether earnings and confidence can hold up as the longer-term costs become clearer.
