Wall Street tumbles as trade war escalates, wiping out post-election gains

Stocks fell sharply on Tuesday as escalating trade tensions between the U.S., Canada, Mexico, and China rattled investors. The losses erased all gains the S&P 500 had made since Election Day.

What we know:

The Trump administration imposed new 25% tariffs on imports from Canada and Mexico on Tuesday while doubling tariffs on Chinese imports. In response, all three countries announced retaliatory tariffs, further fueling fears of an economic slowdown.

• The S&P 500 fell 1.2%, with over 80% of its stocks closing lower.
• The Dow Jones Industrial Average dropped 1.6%.
• The Nasdaq slipped 0.4%, briefly hitting a 10% decline from its recent high before rebounding due to gains from Nvidia and Microsoft.

Financial stocks took a significant hit, with JPMorgan Chase down 4% and Bank of America dropping 6.3%. European markets also saw steep declines, with Germany’s DAX falling 3.5% as automakers faced losses.

Despite the turbulence, the Federal Reserve is expected to hold interest rates steady at its next meeting in March, with uncertainty surrounding the economic impact of tariffs playing a key role.

What they're saying:

Philip Luck, an economist at the Center for Strategic and International Studies, warned of rising costs for consumers: "25% tariffs on Canada and Mexico, our second and third largest trading partners, are going to increase costs for everyday Americans by an enormous amount."

Meanwhile, Commerce Secretary Howard Lutnick suggested a compromise may be in the works, stating that the U.S. would likely meet Canada and Mexico "in the middle" on tariffs after Trump’s policies "rattled the economy."

Major retailers Target and Best Buy sounded alarms about the effects of tariffs on their businesses.

• Best Buy shares plunged 13.3%, the biggest drop among S&P 500 stocks, after warning that vendors are likely to pass higher tariff costs onto consumers.
• Target stock fell 3%, despite beating earnings expectations, citing "meaningful pressure" on profits from tariffs.

"International trade is critically important to our business and industry," said Best Buy CEO Corie Barry.

Barry said China and Mexico are the top two sources for products that Best Buy sells, and it also expects vendors to pass along tariff costs, which would make price increases for American consumers likely.

The other side:

Retaliation to Trump's tariffs has been swift. 

China responded to new U.S. tariffs by announcing it will impose additional tariffs of up to 15% on imports of key U.S. farm products, including chicken, pork, soy and beef, and expanded controls on doing business with key U.S. companies. Canada plans on slapping tariffs on more than $100 billion of American goods over the course of 21 days. Mexico also plans tariffs on goods imported from the U.S.

Big picture view:

Companies in the S&P 500 are wrapping up the latest round of quarterly financial reports. They've posted broad earnings growth of 18% for the fourth quarter. But Wall Street has already trimmed expectations for the current quarter to about 7% growth from just over forecasts of 11% at the beginning of the year.

"The hit to growth is more of the commentary that we’ll be looking for from companies," said Kevin Gordon, senior investment strategist at Charles Schwab.

Concerns about profits follow a series of economic reports with worrisome signals that include U.S. households becoming more pessimistic about inflation and pulling back on spending. Consumer spending has essentially driven U.S. economic growth in the face of high interest rates.

Wall Street has been hoping that the Federal Reserve would continue lowering interest rates in 2025. The central bank has signaled more caution, though, partly because of uncertainty surrounding the economic impact of tariffs. The Fed is expected to hold rates steady at its upcoming meeting later in March.