The U.S. stock market has been navigating significant volatility in 2025 following the imposition of steep tariffs by the Trump administration. The S&P 500, which initially suffered a sharp decline after the announcement of “Liberation Day” tariffs in early April, has since staged a remarkable rebound. Yet, the looming question remains: could these tariffs trigger a broader economic recession and a consequential market crash? Examining historical precedents alongside current market dynamics offers valuable insights into the risks and opportunities for investors amid escalating trade tensions.

Contents

The Surge and Fall of the S&P 500 in the Wake of Tariff Announcements Historical Context: Tariffs and Economic Recessions in the U.S.Stock Market Performance During Past Recessions: Lessons for Investors The Risks of Market Timing Amid High Volatility and Economic Uncertainty Strategic Investment Considerations During Trade-Driven Uncertainty

The Surge and Fall of the S&P 500 in the Wake of Tariff Announcements

Following Donald Trump’s victory in the 2016 presidential election, the S&P 500 rallied sharply as investors anticipated robust economic growth driven by anticipated tax reforms and deregulation. However, this initial optimism was tempered when the administration shifted focus to aggressively revamping U.S. trade policies. Starting in early 2025, tariffs were imposed on goods imported from China, Canada, Mexico, and other key trading partners. The introduction of tariffs on aluminum, steel, and automotive imports led to a marked downturn in the S&P 500, culminating in a staggering loss of over $6 trillion in market value within just two trading days after the April tariff announcement.

The recovery that followed was surprising given the scale of the initial selloff. The index rebounded to record levels, climbing 2% year-to-date and flirting with all-time highs. This bounce was partly driven by indications that the administration might moderate some of its more aggressive tariff measures, giving investors hope for a potential easing of trade tensions. However, analysts caution that these tariffs remain largely in place, and the risk of renewed volatility persists.

Highlights:

The S&P 500 experienced a dramatic selloff exceeding $6 trillion in value due to tariff announcements.
The index has since rebounded, up 2% year-to-date and nearing record highs.
Market optimism is tempered by uncertainty around ongoing trade negotiations and tariff enforcement.

Historical Context: Tariffs and Economic Recessions in the U.S.

Historical evidence highlights the risk that steep tariff increases pose to economic stability. According to research by Yale University’s Budget Lab, the effective tariff rate on U.S. imports rose from 2.5% in 2024 to 15.6% in 2025, marking the highest level since 1937. This increase of over 13 percentage points compressed into a single year is unprecedented in modern U.S. history and mirrors protectionist policies seen in the early 20th century, particularly the period from 1918 to 1933.

Between 1918 and 1933, the U.S. economy experienced five recessions, including the Great Depression, a time characterized by extensive tariff hikes and prolonged economic contraction. The accelerated timeline of the recent tariff increases raises concerns that the economy may face similar headwinds. During this earlier period, the U.S. economy spent approximately half the time in recession, illustrating the severity of protectionist policies as a drag on growth.

This historical parallel suggests that President Trump’s tariffs could act as a catalyst for an economic downturn in the near term, potentially leading to a recession that historically correlates with sharp stock market declines.

Highlights:

The effective U.S. import tariff rate rose dramatically in 2025, reaching levels not seen since 1937.
The early 20th century’s tariff increases coincided with multiple recessions and the Great Depression.
Elevated tariffs could increase the risk of recession, putting downward pressure on stock markets.

Stock Market Performance During Past Recessions: Lessons for Investors

The relationship between economic recessions and stock market performance is well-documented. Since the inception of the S&P 500 in 1957, the index has experienced an average peak-to-trough decline of 32% during recessions. The severity of these downturns has varied, with the smallest decline recorded at 14% during the 1960 recession and the most severe drop of 57% occurring during the 2007-2009 financial crisis.

This pattern underlines the potential for substantial losses in the stock market if a recession triggered by trade policy or other factors materializes. Market participants should be aware that recessions often result in prolonged bear markets, which can erode investor wealth significantly. However, history also shows that market recoveries can be robust once economic conditions stabilize, reinforcing the cyclical nature of financial markets.

Highlights:

The S&P 500 has declined an average of 32% during recessions since 1957.
The range of peak-to-trough declines during recessions spans from 14% to 57%.
Past recessions have led to significant stock market downturns, followed by eventual recoveries.

The Risks of Market Timing Amid High Volatility and Economic Uncertainty

In response to fears of a potential market crash, some investors might consider selling their holdings and waiting on the sidelines until economic conditions improve. While this approach may seem prudent, it carries significant risks. Market timing strategies often fail because the best and worst trading days frequently occur in clusters. Data from JPMorgan Chase reveals that seven of the ten best trading days over the last two decades occurred within two weeks of the ten worst days.

Missing these key rebound days can severely impact long-term investment returns, underscoring the importance of maintaining a diversified portfolio and staying invested through market volatility. Rather than completely exiting the market, investors may benefit from rebalancing their portfolios, reducing exposure to weaker holdings, and building cash reserves. These reserves can be deployed opportunistically to purchase high-conviction stocks at attractive valuations during market corrections.

Highlights:

Market timing is challenging due to the clustering of best and worst trading days.
Missing key rebound days can significantly reduce long-term returns.
Maintaining diversification and cash reserves enables investors to capitalize on market dips.

Strategic Investment Considerations During Trade-Driven Uncertainty

Investors navigating the current market environment influenced by tariffs and trade tensions should focus on quality and long-term growth potential. Stocks with solid earnings visibility and sustainable competitive advantages tend to weather economic downturns better. At the same time, sectors sensitive to interest rates, consumer spending, and global trade—such as manufacturing, financials, and consumer discretionary—may experience heightened volatility.

Given the elevated valuations near historic highs, prudence is warranted in initiating new positions without thorough fundamental analysis. Building liquidity to take advantage of possible corrections can enhance portfolio resilience and provide opportunities for wealth accumulation when markets stabilize. Additionally, closely monitoring ongoing trade negotiations and policy announcements will remain critical for anticipating shifts in market sentiment.

Highlights:

Focus on high-quality stocks with reliable earnings growth during uncertain times.
Sectors closely linked to trade and consumer demand may face increased volatility.
Maintaining liquidity is crucial for capitalizing on buying opportunities amid market fluctuations.