US economy outlook: Trump's tariffs spared Americans in 2025 — but how will 2026 feel?

U.S. tariffs under the Trump administration materially increased costs last year—tariff revenue rose by roughly $187 billion year-over-year (nearly a 200% jump), with the broadest tariffs having raised about $130 billion by Dec. 14—and businesses initially absorbed roughly 80% of the burden. Goldman Sachs estimates tariffs added ~0.5 percentage point to 2025 inflation and could add another ~0.3ppt in H1 2026 as inventory buffers run out and firms begin passing higher levies to consumers, likely hitting low‑margin items such as groceries; political and legal developments (presidential rollbacks/delays and an imminent Supreme Court ruling) will determine the pace and distributional impact.

Analysis

Market structure: Tariff pass‑through shifts profits from importers to consumers over H1 2026 — Goldman’s +0.3pp inflation forecast and 0.5pp contribution in 2025 imply consumer staples with low margins (grocers, basic food processors) are most exposed while branded-packaged food (PEP, KO) and commodity producers (materials, energy) can gain pricing power. Inventory destocking means near-term demand for imports falls but reinventorying at higher tariff rates will raise input costs and compress margins across retail and electronics supply chains. Cross‑asset: higher goods inflation tends to lift nominal yields and USD (expect upward pressure on 2s/10s and higher break‑evens), support commodities and gold, and increase realized equity volatility especially in consumer names.

Risk assessment: Tail outcomes include a Supreme Court decision overturning major tariffs (sharp disinflation shock, equities rally) or tariff escalation/global retaliation (stagflation, higher commodity prices, earnings shocks). Immediate windows: court ruling and tariff exemptions in the next 2–8 weeks; short term (Q1–H1 2026) sees margin squeezes and price pass‑through; long term (post‑H2 2026) risk of structural reshoring and permanently higher consumer prices. Hidden dependencies: firm-level inventory cycles, FX pass‑through, wage stickiness and Fed policy; key catalysts are CPI prints (monthly >0.3% goods component), court ruling, and administration exemptions.

Trade implications: Favor protection via inflation hedges (short‑duration bonds, TIPS, commodities) and relative long exposure to firms with clear pricing power (PEP, KO) and banks/asset managers (GS) that benefit from higher yields. Short/hedge consumer staples/grocers with thin margins (KR, TGT) and select retailers; use options to limit downside around timing uncertainty (buy puts ahead of earnings or court ruling). Rotate into materials/energy (XLB/XLE) and financials (XLF) if 10y Treasury rises >25bp from current levels or CPI goods component prints >+0.3% M/M twice.

Key Decisions for Investors

• Establish a 2–3% portfolio position long in TIPS (TIP ETF) within 2–4 weeks as an inflation hedge; scale to 4% if the goods component of CPI prints >+0.3% M/M in two consecutive months or Goldman’s forecast of +0.3pp manifests.
• Initiate a pair trade: long PepsiCo (PEP) 2% weight and short Kroger (KR) 2% weight (equal notional) to capture pricing power vs margin squeeze into Q2 2026; set a relative stop of 6% and target 6–12% outperformance within 6–12 months.
• Buy a protective put spread on Target (TGT) — for example buy May 2026 1–2% OTM put / sell deeper OTM put to limit cost — sized to 1–2% of portfolio as downside hedge against tariff‑driven margin shocks into Q2 earnings.
• Overweight financials (XLF) and GS exposure by 2–3% if 10‑year Treasury yield rises >25bp from current levels or CPI headline rises by >0.3% M/M; consider short duration bond exposure (BIL) to replace long nominal duration.
• Act within event windows: reduce inflation‑sensitive long commodity/inflation trades by 30% if the Supreme Court rules to strike down broad tariffs (expected in weeks), or add 50% to commodity/TIPS positions if the court upholds tariffs or President re‑imposes broad levies.