If you’ve been tuned into the news lately, you’ve probably heard a lot about tariffs. The current administration’s latest economic push has introduced a wave of uncertainty in the market. But what exactly is the impact of tariffs?

In this week’s Money Wisdom Question Series, Heath Grossman, CFP® breaks down the indirect effects tariffs can have on the stock market and what that could mean moving forward.

What is a Tariff?

While the market is not directly affected by tariffs, they can certainly have an indirect impact. A tariff is essentially a tax on a good or product that is imported into the United States. Typically, they are a percentage of a product’s value.

For instance, if a company imports an entire product, or even just a component that will later be manufactured or assembled domestically, a tariff increases the cost of that import.

Who Pays the Cost?

In this scenario, the company is faced with a decision: either absorb the added expense or pass that cost onto the consumer by raising prices. If they choose to absorb the cost of the tariff, it cuts into their profit margins. On the other hand, if they pass it on to the consumers — people like you and me — those higher prices might discourage them from purchasing the product. Either way, the company risks a decline in profits.

What is the Impact on the Market?

The stock market is ultimately driven by the perceived value of publicly traded companies, particularly their ability to generate profits and sustain employment. When rising costs lead to shrinking profits and potential layoffs, it can have a ripple effect, negatively impacting both the stock market and the broader economy.

That said, given the uncertainty in today’s economic landscape, it’s difficult to predict exactly how tariffs will ultimately play out in the markets. That’s why it’s important to have a long-term financial plan for retirement. Markets will rise and fall, and policies will change, but with a solid strategy in place, you’re better positioned to weather short-term volatility and stay on track toward your long-term goals.