Will the Stock Market Crash if President Trump's Tariffs Cause a Recession? History Has a Clear Answer for Investors.

The S&P 500 (SNPINDEX: ^GSPC) nosedived after President Donald Trump unveiled a surprisingly severe slate of tariffs on April 2, a date he dubbed "Liberation Day." The benchmark index shed more than $6 trillion in the next five trading sessions and closed nearly 19% below its record high on April 8.

Investors recently got more bad news: U.S. gross domestic product (GDP) decreased at an annualized 0.3% rate in Q1 2025, the first economic contraction since Q1 2022. That's particularly alarming because GDP rose 2.4% in Q4 2024, so the U.S. economy pivoted from growth to contraction remarkably quickly under President Trump.

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While GDP dropping in a single quarter doesn't mean the U.S. economy has entered a recession, it's undoubtedly a step in that direction. Economists surveyed by The Wall Street Journal put the odds of a recession in the next 12 months at 45% in April, up from 22% in January.

Will the stock market crash if President Trump's trade policies tip the U.S. economy into recession? History gives a crystal-clear answer.

The S&P 500 typically declines when U.S. GDP contracts

GDP measures the size of an economy. It's calculated as the sum of four data points: consumer spending, business spending, government spending, and net exports. Excluding the recent contraction, GDP has only decreased during three quarters in the past decade, and the S&P 500 performed dismally during those periods, as detailed below:

• 2020: Annualized GDP decreased 5.5% in Q1 2020 and 28.1% in Q2 2020 as the COVID-19 pandemic spread rapidly throughout the world, forcing business closures and disrupting supply chains. That led to a brief recession during which the S&P 500 fell 34% from its record high.
• 2022: Annualized GDP decreased 1% in Q1 2022 as supply-chain disruptions created by the pandemic led to the worst inflation in four decades, prompting the Federal Reserve to raise interest rates at a historically aggressive pace. The U.S. economy avoided a recession, but the S&P 500 still fell 24% from its record high.

The economic contractions listed above were caused by external factors -- namely, a global pandemic and scorching inflation -- but the latest contraction was a self-inflicted wound driven by a dramatic shift in U.S. trade policy.

During the first quarter, Trump imposed tariffs on goods from China, Canada, and Mexico, as well as duties on steel and aluminum imports. He also announced plans for more severe reciprocal tariffs, but those duties won't take effect until the second quarter.

That means "Liberation Day" tariffs only had an indirect impact on first-quarter GDP. They pushed businesses to stockpile inventory, which led to the largest trade deficit on record, so the "net export" component of the GDP equation was a large negative number. But the direct impact of those tariffs won't show up until second-quarter GDP data prints in July.

That's important because the "Liberation Day" duties represent the single largest tariff hike in history and raised the average tax on U.S. imports to its highest level in more than 100 years. I's reasonable to assume economic conditions may deteriorate further in the current quarter, perhaps even to the point of recession.

Image source: Getty Images.

History says the S&P 500 will crash if the U.S. economy slips into recession

The S&P 500 has historically fallen sharply during recessions. The chart below shows the peak-to-trough decline in the benchmark index during each economic downturn since its inception in March 1957.

Data source: Truist Advisory Services.

As shown above, the S&P 500 has declined by an average of 31% during recessions. While past performance is no guarantee of future results, we can apply that data to the present situation to make an educated guess.

The S&P 500 peaked at 6,144 in February 2025. If the U.S. economy suffers a recession, the index could drop 31% to 4,239, provided its performance aligns with the historical average. That implies 23% downside from the current level. In short, history says the stock market would indeed crash if President Trump's tariffs cause a recession.

However, that doesn't mean investors should avoid the stock market today. First, there's no guarantee the U.S. economy will actually suffer a recession. Second, the S&P 500 has recovered from every past drawdown, and there's no reason to expect a different outcome this time. With the index currently 11% below its high, the present situation is actually a compelling time for patient investors to buy stocks.

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Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.