Tariffs aren't exactly top of mind for most Americans during the Christmas holidays, but as 2026 approaches, a few trade decisions from President Donald Trump could end up steering everything from the U.S. economy to your portfolio.
A new analysis from Oxford Economics lays out four potential tariff paths for the year ahead, ranging from trade peace to a full-blown war with China, that could send inflation, jobs and Wall Street swinging in dramatically different directions.
Whether Trump opts for escalation or rollback, one thing is clear: tariffs still matter. A lot.
“US President Donald Trump has shown that he’s willing to implement drastic tariff changes at short
notice if he sees fit,” said Dr. Daniel Harenberg, lead economist at Oxford Economics.
Here's what each scenario could mean for the U.S. economy and the markets you care about.
Four Tariff Scenarios That Could Shake US Economic Growth In 2026
Scenario 1: "Liberation Day" Reversal
This is the most favorable story for U.S. consumers and for risk assets. In this scenario, the Trump administration pivots ahead of midterms and starts rolling back tariffs to the levels seen at the end of 2024.
“In our extreme upside scenario, US tariffs fall back to the levels prior to April 2,” Harenberg said.
Trading partners follow by cutting their own tariffs and offering preferential supply-chain deals.
According to the analysis, "US consumer and producer prices rise much more slowly in 2026 to 2029, partly because of lower tariffs, but mainly because of the negotiated preferential supply deals."
With cheaper inputs entering, supply chain pressures "become very subdued," thereby boosting domestic demand.
For markets, this is a classic "risk-on" setup.
Lower inflation supports bonds, margins improve for manufacturers and retailers, and global equities typically respond well when trade flows accelerate.
Oxford finds world GDP rising to 3% in 2026 — and while the U.S. doesn't get the biggest headline boost, domestic demand strengthens meaningfully.
Equity markets tend to love cheaper imported components and lower supply-chain stress—conditions that historically favor retailers, consumer discretionary names, and manufacturers.
Bond markets would likely lean toward lower yields as import-driven disinflation works through the CPI basket.
Scenario 2: The Quiet Lift – Supreme Court Strikes Down IEEPA Tariffs
A second, more modest upside scenario emerges if the U.S. Supreme Court strikes down tariffs imposed under the International Emergency Economic Powers Act.
The report notes that in this case "the US effective tariff rate on imports falls notably to 5.8%… from the current 12.7%."
But here's the catch: U.S. trading partners don't reciprocate. So the domestic impact is positive but limited. Demand increases slightly, and inflation eases slightly as imported inputs become cheaper.
Consumers obtain slightly cheaper goods, and inflation declines, but not dramatically.
“The impact on GDP is rather modest" because the response is unilateral,” Oxford Economics believes.
The stock market usually treat this kind of event as a footnote rather than a major catalyst. Yet, stocks with heavy import exposure like apparel, electronics, and home goods would benefit.
Still, don't bet on this scenario sticking around for long. "It also seems likely that Trump would subsequently find alternative avenues to reinstate tariffs of similar magnitude," Oxford Economics warns.
Scenario 3: Industrial Protectionism – The US Goes Big On Tariffs
The tone shifts in the third scenario, which introduces aggressive industrial protectionism.
Here, the Trump administration imposes 50% tariffs on semiconductors, autos, and pharmaceuticals, and other countries retaliate symmetrically.
Oxford Economics writes bluntly that "world GDP growth slows markedly… [and] the drop in aggregate demand amplifies the tariff impact."
For the U.S., this is where higher input costs collide with weaker global demand.
Stocks tied to autos – think of Michigan-based General Motors Co. (NYSE:GE) and Ford Motor Co. (NYSE:F) – as well tech hardware could feel the heat.
Among trading partners, Mexico and Canada are hardest hit, with GDP growth declining by up to 1.4 percentage points.
Treasury yields would likely fall as recession fears build, and the dollar often rallies in the early stages of risk-off episodes. Commodities, especially industrial metals, typically weaken as global demand softens.
Scenario 4: A Full-Blown US-China Trade War
The fourth scenario is the one investors should hope stays hypothetical: a full U.S.–China trade war.
That's when things go from bad to worse, and your portfolio starts bleeding red.
In this extreme case, the U.S. slaps 145% tariffs on Chinese imports, and China responds with 125%.
There are no exceptions. The report warns that "tariffs and… supply chain stress cause US inflation to rise by 1 percentage point in 2026," a jump that would immediately force markets to reevaluate the path of interest rates.
Risk assets across the board, such as equities, credit, and emerging markets, would feel the shock.
Oxford Economics estimates that the S&P 500 – as tracked by the Vanguard S&P 500 ETF (NYSE:VOO) – is set to drop more than 10%.”
Investors should watch for gold rallies, VIX spikes, and defensive rotation.
This is the closest thing to a stagflation shock — higher inflation, lower growth, and messy price action across markets.
Why Investors Can't Afford To Ignore Tariffs
Tariffs may seem like background noise after months of relative calm. However, they still shape the cost of goods, the strength of U.S. manufacturing, corporate earnings, and the inflation outlook that guides Federal Reserve policy.
They can move markets just as sharply as a jobs report or a surprise CPI print.
And as Oxford Economics reminds us, trade tensions don't simmer; they can erupt rapidly.
"Trade tensions escalate within a few days like they did after liberation day," expert said.
One tweet, one court ruling, one press conference, and an entire market can reprice overnight.
Heading into 2026, tariffs remain one of the most powerful and underestimated macro swing factors for the U.S. economy.
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