Tariffs: Market Risk or Opportunity?

Uncertainty is rising with tariffs looming. What are the immediate implications for the market and the economy? Scroll through the slideshow below to view some of the charts Roundhill will be watching.

Does heightened trade policy uncertainty mean it's time to sell stocks? Historically, this has not been the case. While historically extreme readings in the Trade Policy Uncertainty Index have led to some chop in the S&P 500 and lower-than-average forward returns over the next three and six months, S&P 500 stocks tended to recover in a remarkable fashion. In the subsequent twelve months following 95th percentile readings in trade policy uncertainty, the S&P 500 is up on average 12.4% versus a historical average of 10.3% since 1985.

Trade policy uncertainty is skyrocketing as investors attempt to handicap the longer-term risks from the potential U.S. tariffs on China, Canada, and Mexico. The latest reading from the Trade Policy Uncertainty Index was in the 99th percentile of all historical observations going back 40 years.

One week removed from the DeepSeek shock, tariffs have catapulted to the front page as President Trump threatened tariffs on Mexico, Canada, and China. The mention of “tariffs” in S&P 500 company transcripts has surged in 2025 after a slow crawl in 2024. Earnings season will likely see further talk of tariffs from S&P companies, but for now, the tally remains below 2018 levels.

Within Bloomberg news stories, the mentions of “trade war” have surged but remain below the levels from 2018 and 2019. The tariff implementation pauses on Mexico and Canada could keep trade war talk from getting too out of hand, but attention will increasingly focus on China and whether a deal can be made between Trump and Xi.

After 26 consecutive months of the ISM Manufacturing Purchase Managers Index (PMI) registering readings under 50, the manufacturing diffusion index entered expansionary territory with a 50.9 reading for January 2025. Despite the positive news, a prolonged period of tariff uncertainty could hamper the U.S. manufacturing space.

The current uncertainty and potential for deterioration in tariff negotiations between the U.S., Canada, Mexico and China could pressure global supply chain networks. Tariff implementation and escalation without resolution could cause transportation costs to rise and manufacturing to slow.

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Glossary:

The ISM manufacturing index, also known as the purchasing managers' index (PMI), is a monthly indicator of U.S. economic activity based on a survey of purchasing managers at manufacturing firms nationwide.

U.S. Categorical Economic Policy Uncertainty: Trade Policy - The Categorical Data include a range of sub-indexes based solely on news data. These are derived using results from the Access World News database of over 2,000 US newspapers. Each sub-index requires our economic, uncertainty, and policy terms as well as a set of categorical policy terms. 

• Trade policy - import tariffs, import duty, import barrier, government subsidies, government subsidy, wto, world trade organization, trade treaty, trade agreement, trade policy, trade act, doha round, uruguay round, gatt, dumping

The Global Supply Chain Pressure Index (GSCPI) tracks the state of global supply chains using data from the transportation and manufacturing sectors. The index is updated at or shortly after 10:00 a.m. on the fourth business day of each month. The GSCPI integrates a number of commonly used metrics with the aim of providing a comprehensive summary of potential supply chain disruptions. Global transportation costs are measured by employing data from the Baltic Dry Index (BDI) and the Harpex index, as well as airfreight cost indices from the U.S. Bureau of Labor Statistics. The GSCPI also uses several supply chain-related components from Purchasing Managers’ Index (PMI) surveys, focusing on manufacturing firms across seven interconnected economies: China, the euro area, Japan, South Korea, Taiwan, the United Kingdom, and the United States.

The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.