Four Ways Tariffs Are Reshaping Markets

The White House is simultaneously proposing and enacting sweeping, country-specific tariffs. Most notably, these include:

• an additional 10% tariff on goods from China, adding to the 10% levy imposed in February and,
• 25% tariffs on Mexican and Canadian goods, which Trump implemented and then partially retracted in early March, giving the countries a one-month reprieve.

We can see the market impact of country-specific tariffs when reviewing the Morgan Stanley Institutional Equity Division Tariff Risk Index, a basket of stocks with high sensitivity to increased tariffs on China and Mexico. As of March 6, relative to the S&P 500 Index, China and Mexico tariff-exposed stocks had sold off about 22% and 10%, respectively, since March 2024 and had declined by 12% and 10%, respectively, since Trump took office in January 2025.

The technology, materials, energy and industrials sectors, with foreign revenue exposure as high as 57%, are particularly exposed to tariffs. For example, recent tariffs targeting aluminum and steel could place a drag on the materials sector, and China-specific tariffs or retaliation efforts could have secondary impacts for tech. Should the tariff regime escalate further, Morgan Stanley’s Global Investment Office expects the utilities and health care sectors to outperform due to their defensive nature and low tariff exposure.

Markets are likely to quickly price tariff-related risks to a particular sector, industry or stock. Steel and solar products offer a compelling illustration: In January 2018, Trump imposed tariffs on solar panels and washing machines of 30% to 50%. In March 2018, he imposed tariffs of 25% on steel and 10% on aluminum from most countries. Following these measures, industries impacted by the tariffs underperformed: Both the MAC Global Solar Energy Index and the NYSE Arca Steel Index declined by more than 11% in the first six months following the tariffs’ enactment. In February 2025, Trump announced additional tariffs of 25% on steel and aluminum. While the tariffs are expected to go into effect in March 2025, the NYSE Arca Steel Index has already declined roughly 5% and has been volatile since the president’s announcement.¹

If a robust and long-lasting universal tariff regime comes to fruition, defensive U.S. stocks, such as those in utilities, health care or consumer staples, may outperform cyclical sectors like industrials or consumer discretionary, which may be more vulnerable to increased import costs and reduced international trade. In such an environment, stock-picking becomes more prudent. Among consumer discretionary stocks, for example, investors could see increased variability in returns between companies with stronger pricing power and the ability to absorb tariffs, and those without. Additionally, consumer discretionary companies with greater reliance on revenues generated from lower-income consumers will likely experience the most pressure, as higher prices weigh more heavily on the purchasing power of those with less to spend. On the other hand, if some tariff risks are avoided and prove mostly benign, cyclicals may outperform defensives.

Areas such as software, cybersecurity, defense tech and large-cap financials, some of which have lower foreign revenue exposure, are less likely to feel the impact of tariffs; they may benefit in tandem from the momentum behind AI adoption. Furthermore, utilities have low tariff exposure and may serve as a defensive leader should broad-based tariffs increase market pressure.