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25% tariffs on Mexico, Canada take effect

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Tariffs comes after several shaky US economic data

releases

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S&P 500 stood at 21.3 P/E as of Monday, vs 15.8 long-term

average

(Updates throughout with fresh market data, comment)

By Lewis Krauskopf

March 4 (Reuters) - The U.S. stock market is facing a

reckoning with the arrival of President Donald Trump's latest

tariffs.

With fresh declines on Tuesday, the benchmark S&P 500

is down more than 6% from its February 19 all-time closing high,

and in negative territory for the year. The tech-heavy Nasdaq

Composite was last down over 10% from its mid December

closing peak, on pace to show it has been in a correction for

several months.

Tariffs are exacerbating the headache for investors already

worried that a series of weakening U.S. economic reports is

raising concerns about growth.

The arrival of the tariffs "brings with it uncertainty as

far as the earnings of some companies as well as the overall

direction of the U.S. economy," said Peter Tuz, president of

Chase Investment Counsel.

"I think there was some hope that before they were

implemented there would be deals struck with the affected

parties and we wouldn't see them."

Trump's new 25% tariffs on imports from Mexico and Canada

took effect on Tuesday, along with a doubling of duties on

Chinese goods to 20%.

The levies on foreign imports are widely seen by analysts as

likely to increase inflation and to cut into corporate profits.

Tariffs could pose challenges for companies by complicating

supply chains or driving costs higher, some of which would be

expected to be passed onto consumers in the form of higher

prices, investors have said.

Morgan Stanley estimates that 25% tariffs on Mexico and

Canada and 10% tariffs on China through 2026 could collectively

reduce earnings for the S&P 500 by 5% to 7%, the bank's equity

strategists said in a note on Monday.

Nationwide Chief Economist Kathy Bostjancic said in a note

that the tariffs could detract at least 1 percentage point from

gross domestic product growth and raise inflation by 0.6

percentage points, if there are proportionate retaliatory

tariffs by the targeted countries and the levies are maintained

throughout 2025.

ECONOMIC HEADWINDS

Beyond the levies in focus on Tuesday, Trump recently also

floated a reciprocal tariff on European goods.

With the implementation of tariffs, the multinational

companies that are among the biggest weights in the S&P 500

"will pay the price because they will have their profit margins

squeezed," said Michael O'Rourke, chief market strategist at

JonesTrading.

Meanwhile, 41% of S&P 500 revenue comes from outside the

United States, according to Apollo Global Management, suggesting

a tariff-induced global slowdown stands to reverberate in the

U.S. as well.

The start of the added tariffs comes as a number of recent

U.S. economic releases have disappointed or weakened, including

consumer confidence, business activity and retail sales.

A survey on Monday showed U.S. manufacturing was steady in

February, but a measure of prices at the factory gate jumped to

near a three-year high, and it was taking longer for materials

to be delivered, suggesting that tariffs on imports could soon

hamper production.

"If some of these tariffs stick... it would create some

headwinds for the economy that the stock market probably would

not like," said Scott Wren, senior global market strategist at

the Wells Fargo Investment Institute.

While stock valuations have moderated somewhat with the

latest pullback, the S&P 500 as of Monday was still trading at

21.3 times based on price-to-earnings estimates, well above its

long-term average of 15.8, according to LSEG Datastream.

In a sign of investor worry, the Cboe Volatility index

on Tuesday was at its highest level since late December.

Equities "are dealing with potential new headwinds," Lisa

Shalett, chief investment officer at Morgan Stanley Wealth

Management, said in a note on Monday.

"While investors, consumers and CEOs prefer predictability,

a recent run of weak economic data and falling consumer

confidence, alongside policy uncertainty, has caused many to

revisit the growth outlook."