Tariff Uncertainty Weakens Business And Consumer Sentiment

The early days of the second Trump administration have been anything but quiet. A flurry of executive orders, the blunt approach to improving government efficiency (DOGE), continued threats of broad universal tariffs, and geopolitical tensions have all created much noise for market participants to navigate and interpret.

Beginning with tariffs, the base-case assumption for financial markets has been that the administration will use these levies primarily as a threat to achieve some other policy goal, for example, border security. However, events of the past several days have raised speculation of a broader objective.

If the goal of tariffs is raising federal revenues and making domestic goods more competitive, universal tariffs are likely necessary, which could come with much greater inflation and growth implications. If tariffs are more targeted against certain countries — like China — as we saw in the first Trump administration, it is easier for U.S. companies to achieve import substitution, that is, sourcing similar products from other countries with lower/no tariffs.

If universal tariffs become more likely, financial markets are likely to reprice in anticipation of impacts on inflation, consumption, and U.S. corporate profit margins. Tariffs are a tax that must be absorbed by some mix of U.S. consumers and businesses.

Recent surveys of both individuals and businesses showed weaker sentiment, with tariff uncertainty mentioned for both as a notable concern. The S&P PMI report for February showed activity in the services sector contracting for the first time in two years. After rising in the wake of the election, expectations for future activity fell to the lowest level since September, with respondents citing concerns surrounding tariffs, higher prices, and geopolitical risks. That same day, the February University of Michigan consumer survey showed long-term inflation expectations rising to the highest level since the peak of the Covid inflation surge, something not likely to be overlooked by Fed policymakers.

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Jason Haley joined ALM First in 2008 and is the firm’s chief investment officer. He heads ALM First’s Investment Management Group (IMG), which is responsible for leading the investment process and investment theme development. Haley also oversees all capital markets activities, including portfolio management, trading, market research and commentary, and execution of hedging and funding strategies for the firm’s depository clients. He holds an MBA with a concentration in finance and a BBA with a concentration in marketing, both from The University of Mississippi.

Not an offer for investment advisory services. This content is provided for general educational information and market commentary purposes only.