US and European stocks slid on Tuesday amid a growing trade war sparked by the US placing new tariffs on Mexico and Canada.
President Donald Trump Tuesday levied new 25% tariffs on goods imported from Canada and Mexico, along with an additional 10% tariff on goods imported from China. Energy imports from Canada will be taxed at a lower rate of 10%.
The Morningstar US Market Index was down roughly 1.3% Tuesday morning following a 1.82% loss Monday. Stocks posted losses Tuesday morning across the entire Morningstar Style Box, with the biggest declines coming among small growth stocks, down 1.75%. Large value stocks showed the smallest declines, falling roughly 1.2%.
The S&P 500, meanwhile, fell 1.4% and the Nasdaq lost 1.3%.
The yield on the 10-year Treasury note was little changed at 4.17% Tuesday after falling Monday to 4.18%.
While US government yields have been rising amid worries about stubborn inflation, the slide toward a trade war have sent investors to the relative safety of the bond market. With stocks faltering, bonds have been outperforming the stock market.
Canadian, European Stocks Fall
In Canada, the widely-watched S&P/TSX Composite Index fell 1.9% at open on Tuesday, and the Morningstar Canada Index was down 2.1%. The Canadian economy, already faltering in recent months, could take a significant hit from Trump’s move on tariffs.
European stocks declined on Tuesday, erasing the previous session’s gains, led lower by automotive stocks most exposed to the US market. Stellantis STLAM, with a significant production base in Mexico, fell the most at -8% in the European afternoon, with BMW BMW down 6%, Mercedes Benz MBG down 5% and Volkswagen VOW3 down 3%.
An additional weight on the sector was Tuesday morning’s earnings release from Germany’s largest automotive supplier Continental CON, which according to Morningstar analyst Rella Suskin “painted a bleak picture for 2025.” The company is not expecting a recovery in auto production this year.
The relative outperformance of Volkswagen may be a result of the company’s plans to open its Scout EV plant in the US next year, according to Suskin, as this move will strengthen the company’s US production base and lessen its exposure to tariffs.
Trump initially announced the tariffs on Mexico and Canada in early February but delayed their implementation after both countries said they would take measures to address his concerns. He now says those efforts were insufficient and the tariffs will go forward.
“Given President Donald Trump’s comments this afternoon, it appears the tariffs were more than threats or negotiating tools,” says Dominic Pappalardo, chief multi-asset strategist for Morningstar Investment Management. “The violent market selloff confirms that at least some investors didn’t believe the tariffs would ever be implemented, or at least not in their current form.”
Tariff Uncertainty May Bring Volatility
Monday’s tumult comes amid ongoing worries over the strength of the US economy, partly fueled by concerns that new tariffs could dent economic growth and stoke inflation. Markets have been stuck in a holding pattern for weeks as investors waited for more clarity on US trade policy, though there have been signs of a nascent rotation under the surface. Since the beginning of the year, investors have moved away from growth and Big Tech (2024’s winners) toward value and international markets.
With more tariff proposals on the table and the possibility that China, Mexico, and Canada could retaliate, investors should prepare for more choppiness. If the tariffs go into effect Tuesday, Pappalardo expects that “the conversation will quickly shift to 1) How long will they remain in place? and 2) How will the affected countries react?” He thinks it’s too soon to tell, and “that uncertainty will likely lead to elevated volatility in markets until some resolution becomes more clear.”
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
