Wall Street Wanted Tax Cuts. Instead, It Got Tariffs and a Bad Case of Déjà Vu.

It’s been two months since President Donald Trump was inaugurated for his historic nonconsecutive second term. But what was viewed as a boon for Wall Street has turned into something of a nightmare.

During President Trump’s first term, the ageless Dow Jones Industrial Average (^DJI 0.08%), benchmark S&P 500 (^GSPC 0.08%), and growth-centric Nasdaq Composite (^IXIC 0.52%) soared by 57%, 70%, and 142%, respectively. But as of the closing bell on March 19, the Dow Jones, S&P 500, and Nasdaq Composite have fallen by 3.5%, 5.4%, and 9.6% since his return.

In fact, the S&P 500 and Nasdaq Composite have declined by more than 10% from their respective all-time highs, pushing both indexes into official correction territory.

When Trump was victorious in November, investors widely expected his tax policies and focus on deregulation to carry the stock market to new heights. Instead, investors are wading through inconsistent tariff policy and experiencing a really bad case of déjà vu.

The expectation: Trump will slash the corporate income tax rate by 29%

The flagship legislation of President Trump’s first term was the December 2017 passage of the Tax Cuts and Jobs Act (TCJA). While the TCJA did lower personal peak tax rates for most working Americans (these personal tax cuts will sunset on Dec. 31, 2025), it’s best known for permanently reducing the peak marginal corporate income tax rate from 35% to 21%. For context, a 21% maximum marginal corporate income tax rate is the lowest level since 1939.

The idea behind lowering tax liability for businesses is to give companies more capital to spend on hiring, internal innovation, and acquisitions. However, the TCJA led to a different type of investment that Wall Street has absolutely adored.

Prior to the TCJA’s implementation in 2018, S&P 500 companies were collectively repurchasing in the neighborhood of $100 billion to $150 billion worth of their own stock per quarter. But following the TCJA’s passage, S&P 500 companies upped their quarterly share buybacks to between $200 billion and $250 billion, excluding a brief period of reduced buybacks during the pandemic.

For profitable, time-tested businesses with steady or growing net income, buybacks can reduce their outstanding share count and increase earnings per share. In other words, it’s a way that public companies can make their stock appear more attractive to everyday investors.

While on the campaign trail prior to last November’s election, then-candidate Trump proposed the idea of further reducing the corporate income tax rate by 29% — from the current 21% to 15%. But there’s a catch: This tax cut would only apply to businesses that manufacture their products in the U.S.

Investors were intrigued by the prospect of another round of corporate income tax cuts and what that might mean for future share repurchases. When coupled with President Trump’s efforts to deregulate/simplify certain industries, it painted a very promising picture for the stock market.

The reality: Trump brought tariffs to the table, along with a possible trade war

Yet after two months in the White House, no proposals to further reduce the peak marginal tax rate for businesses have hit the president’s desk. This fact is even more of an eyebrow-raiser considering that both houses of Congress are currently controlled by Republicans.

Instead of tax cuts, Wall Street has been given a laundry list of tariffs and the possibility of a budding trade war.

In simple terms, a tariff is a tax placed on goods being imported or exported from a country. President Trump is attempting to use this added duty on imports/exports as a bargaining tool to protect American jobs and make U.S.-manufactured goods more price-competitive with those being made beyond our borders.

But his tariff policy isn’t as cut-and-dried as it appears. Perhaps the biggest concern is the lack of differentiation between input and output tariffs. An output tariff is a duty placed on finished goods being imported into the country. Meanwhile, an input tariff is a tax placed on a component used to make finished goods in the U.S. Input tariffs can make domestic products considerably pricier and hurt U.S. manufacturers.

President Trump’s tariffs are also lacking in consistency. Whether it’s the date that tariffs take effect or the products subject to said tariffs, there’s been little clarity or consistency from the president or his administration.

Lastly, tariffs have been known to coerce retaliation from America’s trade partners. In addition to making goods more expensive, tariffs can damage trust between nations and ultimately weigh on the economic growth prospects of all parties.

It’s déjà vu for the stock market

Although the Dow, S&P 500, and Nasdaq ultimately soared during President Trump’s first term, this wasn’t the case during the first two years of his initial term, which is when he was mired in a tariff-driven trade war with China. Statistically speaking, tariff announcements have a history of roiling the stock market.

It’s been a rough go for Wall Street’s three main stock indexes since Trump’s second term began. ^DJI data by YCharts. Return data from Inauguration Day (Jan. 20)-March 19.

In December, Liberty Street Economics published an analysis (Do Import Tariffs Protect U.S. Firms?) that examined what impact, if any, the tariffs had on stocks. The four New York Federal Reserve economists who analyzed this data at Liberty Street Economics found that public companies directly exposed to President Trump’s tariffs in 2018-2019 performed notably worse on tariff announcement days than those with no exposure.

Furthermore, the four New York Fed economists also uncovered a distinct correlation between companies that had worse stock market returns on tariff announcement days and those with worse future real outcomes. In plainer English, companies that were exposed to the China tariffs in 2018-2019, on average, saw their profits, employment, sales, and productivity decline from 2019 to 2021.

It’s déjà vu for the stock market. President Trump is targeting China (along with Mexico and Canada, thus far) with tariffs, and stocks that have direct exposure to these tariffs are notably underperforming.

If there’s a silver lining amid this uncertainty, it’s that the president’s tariff and trade policies represent a relatively short period in the long timeline of the U.S. economy. Despite the near-term uncertainty being caused by his policies, it won’t have an adverse impact on the long-term growth of the U.S. economy, nor will it severely hamper the stock market.

While it’s statistically probable that President Trump will oversee a recession during his second term, and recessions aren’t good news for stocks historically, every sell-off and correction in the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite has proved to be a buying opportunity for long-term-minded investors. This latest tariff-based tumble in equities should prove no different.