Modeling the impact of tariffs on the global stock market | Insights

In the ever-evolving landscape of global finance, the recent changes in U.S. tariffs have sent ripples across the stock markets, highlighting the delicate interplay between trade policies and investor confidence. Just days following the implementation of new tariffs, the U.S. government announced a 90-day suspension for selected countries, aiming to stabilize the financial markets. This decisive action led to a powerful rally in U.S. equities, which culminated in the largest daily gain since the Global Financial Crisis.

To delve deeper into how these tariffs have impacted the stock market, we utilized the MAC3 Global Equity Model and the MAC3 U.S. Equity Model. Our focus centers on dissecting the factors adversely impacted by these tariffs and identifying those that reaped benefits. The analysis further illustrates the “whipsaw” effect resulting from the U.S.’s abrupt pause on the tariffs.

### Understanding the Risk Model Framework

For our analysis, we employed two versions of the MAC3 Risk Model. The Global Equity Model is robust, consisting of one market factor, 14 style factors, 56 industry factors, and 49 country factors. Conversely, the U.S. Equity Model integrates one market factor, 14 style factors, and 39 industry factors without any country factors.

To estimate factor returns, we implemented cross-sectional regression to create pure factor portfolios. Each portfolio is designed to maintain unit exposure to the target factor while neutralizing exposure to all others. The market factor portfolio is 100% net long, representing a cap-weighted market portfolio. All other pure factor portfolios are dollar-neutral, creating a clearer picture of how specific styles, industries, and countries react to shifts in policy.

### Analyzing Factor Return Movements

Our examination begins with the stock market turmoil induced by tariffs, spanning from April 2 to April 8, 2025. We standardized factor returns into z-scores, which helped us assess performance relative to volatility. The results reflect significant reactions across various factor groups—market/style factors, industry factors, and country factors.

During this period, the Global Market factor exhibited a z-score of -6.17, indicating a considerable negative return shock. Notably, market-related factors such as Residual Volatility and Beta were substantially affected. This is consistent with trends observed in sharp downturns, where high-beta and high-volatility stocks tend to underperform. Conversely, returns from the Profit factor were strikingly positive, showcasing a “flight to quality” often seen in crisis situations.

At the industry level, Consumer Electronics, Oil Exploration & Production, and Electronic Components were particularly hard-hit. The concentration of consumer electronics production in China made these firms vulnerable to tariff threats. Similarly, firms within the Energy sector also faced performance challenges due to fears of an impending global recession.

Among the top performers were industries like Consumer Staples and Health Care, both characterized by domestic operations that shield them from international tariff disruptions. Interestingly, the U.S. country factor emerged as the worst performer, with a z-score of -3.17, reinforcing the notion that domestic equities were not impervious to these tariff impacts.

### The Impact of the Tariff Suspension

The announcement of the tariff suspension came after European markets had closed, making it vital to analyze the subsequent stock market reactions using the MAC3 U.S. Equity Model. On April 9, 2025, we converted the factor returns into z-scores based on the day’s predicted volatility.

Notably, the results highlighted substantial positive returns in the Market factor and Beta factor. For industry factors, Banks and Specialty Finance lagged, while Airlines and Semiconductors experienced notable gains. This rebound following the announcement illustrated the swift recovery potential in the face of easing trade tensions.

### Conclusion

The recent shifts in U.S. tariff policies have reignited global trade tensions, ushering in significant stock market reactions across the globe. Our analysis through the MAC3 Equity Models reveals how geopolitical uncertainty and anticipated trade disruptions profoundly influence investor behavior.

The pronounced decline followed by a rebound in global equity markets underscores the critical nature of analyzing market dynamics within a robust multi-factor framework. Elevated market volatility signals a pivotal moment for global economic dynamics, where understanding the interplay between tariff policies and market performance becomes ever more crucial.

As policymakers navigate this precarious terrain, investors must remain vigilant, recognizing the significance of trade agreements and tariff adjustments. The broader implications for international trade are vast, affecting sectors and industries in ways that call for comprehensive analysis and strategic planning. In a world deeply interconnected through trade, these developments serve as a reminder of the powerful influence of tariffs on the global stock market and the intricate relationship between economic policy and investor sentiment.

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