Will the Stock Market Crash as Tariffs Hit the Economy in 2025? History Offers an Important Clue.

The S&P 500 initially surged after Trump's election but faced headwinds as tariffs increased the average tax on U.S. imports to levels not seen since 1937, potentially triggering a recession. Historical data indicates that the S&P 500 declines an average of 32% during recessions, suggesting a possible market crash if current trade policies persist, though some analysts believe investors are underestimating this risk. Despite the potential for a downturn, JPMorgan Chase strategists advise against market timing, emphasizing that staying invested is paramount, although investors should consider rebalancing portfolios and building cash reserves.

Analysis

The S&P 500, which initially surged following the November presidential election on expectations of economic stimulus, has since faced significant headwinds due to shifts in U.S. trade policy. Implemented tariffs have driven the average tax on U.S. imports from 2.5% in 2024 to an estimated 15.6% in 2025 as of June 2, the highest level recorded since 1937, according to The Budget Lab at Yale University. This rapid escalation, notably the "Liberation Day" tariffs which erased over $6 trillion from the U.S. stock market in two trading days, underscores market sensitivity. Despite a subsequent recovery that has seen the S&P 500 rise 2% year-to-date, attributed to a temporary softening in trade rhetoric, some Wall Street analysts caution against a 'false sense of security' as aggressive tariffs remain merely paused. Historical precedent from 1918-1933, where a similar 14 percentage point increase in import taxes over 15 years coincided with five distinct recessions, suggests a heightened risk, especially given the current tariff hikes have occurred over weeks rather than years. Recessions since March 1957 have historically resulted in an average peak-to-trough decline of 32% in the S&P 500, ranging from 14% to 57%. Consequently, the persistence of current trade policies without favorable resolutions in ongoing negotiations significantly elevates the risk of a recession and an associated market crash, reflecting the overall 'moderately negative' sentiment and 'bearish' tone indicated.

Key Decisions for Investors

• Investors should acknowledge the heightened risk of a market downturn driven by current U.S. trade policies, which have historically led to recessions and an average S&P 500 decline of 32% during such periods.
• Despite the potential for a market crash, attempting to time the market is generally ill-advised, as highlighted by JPMorgan Chase strategists, because missing the market's best recovery days can severely hinder long-term returns.
• Consider re-evaluating portfolios to divest from low-conviction assets, especially with the S&P 500 near record highs, and strategically increase cash positions to capitalize on potential buying opportunities in high-conviction companies at reasonable valuations should a market correction occur.