While investors initially cheered the forthcoming economic agenda of the new administration, pushing stocks higher in the wake of the election, optimism is giving way to pessimism about the impact that tariffs (and possible retaliations) will have on our economy.  On March 4^th, tariffs went into place—25% for Canada and Mexico and an additional 10% for China (on top of the current 10%).  Wall Street knows how tariffs raise import prices, slow economic growth, stunt hiring, delay business plans and push prices higher for the end consumer.  Until the last few weeks, however, it seemed that investors had broadly seen the tariff threat as mostly a negotiating ploy.  With tariffs now beginning to kick in, however, confidence for both consumers and businesses is slipping.

Consumer Confidence Drops

As the rhetoric in Washington over tariffs has heated up, consumer confidence has taken a nosedive.  There are two main gauges of consumer sentiment, the University of Michigan Index of Consumer Sentiment and the Conference Board Consumer Confidence Index®.  Both showed significant deterioration in consumer confidence in their latest readings. The Michigan Index slid 10% from January, reflecting growing consumer fears that inflation could be reignited by tariff-fueled price increases.  Long-run inflation expectations rose to 3.5% for February, up from 3.2% in January.  The Conference Board’s index of consumer confidence sank to 98.3 in February from 105.3 in January and was well below 103, the average expectation of economists surveyed.  Airlines and other travel-related companies are now reporting a pull-back in consumer demand.  There are many other signs that consumers are growing more pessimistic about the near-term outlook for our economy.

Corporate Earnings

We are just finishing up the fourth quarter earnings season, and the numbers were strong.  Earnings were up around 15% year-over-year with revenues up about 5%.  But that’s all history.  In the latest round of conference calls, many CEOs watered down expectations for the coming year, saying that the situation regarding consumer demand and trade policy was simply too fluid for them to issue strong earnings guidance for the year ahead.  Walmart may be the company with the most insight into U.S. consumer buying patterns.  On the recent Walmart conference call, CFO John David Rainey issued an earnings forecast that fell short of Wall Street expectations. He insisted that the company is on the right track but also noted that consumers seem to be moderating their spending.  Many consumer-facing companies are saying similar things.

Market Reaction

Equity markets have lost ground in recent weeks as tariff theory has become tariff reality.  The S&P 500 Index reached record highs last month but has pulled back sharply since.  Ten percent pullbacks in stocks are regular occurrences that happen on average about once per year.  We’re not there yet, but more weakness in stocks is probably in the cards until there is more clarity about what sustainable U.S. trade policy is going to look like.

Inflation

Inflation has taken a back seat to tariffs as the biggest economic concern in 2025, but it has quietly been rising over the past several months.  The Federal Reserve is not likely to continue to lower the Fed Funds rate until it has more clarity on U.S. trade policy and its flow-through impact on consumer prices. Most economists are now expecting the Fed to cut interest rates two or three times in 2025, but it would not be surprising to see the Fed on hold until there is more visibility on trade policy or if the labor market should weaken considerably.

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