To The Moon

$S&P 500(.SPX)$ $SPDR S&P 500 ETF Trust(SPY)$ $SPDR Gold Shares(GLD)$

Goldman Sachs has issued a major warning about the potential impact of global retaliation against the U.S., particularly on the S&P 500. The world is not standing by idly—countries like Canada are not just imposing tariffs but also shifting production and exports away from the U.S.

Back in 2018, when Trump initiated his trade war, the S&P dropped 5% after the U.S. announced tariffs, and the cumulative decline reached 7% when other countries, including Canada and China, responded with counter-tariffs. However, this time, the trade war is expanding globally. It’s no longer just the EU, Canada, and China being affected—every country is now a target.

Trump’s latest move—a 25% tariff on steel and aluminum—puts global steel producers at risk, inviting worldwide retaliation. Such aggressive policies could have severe consequences for the U.S. economy. A market collapse would wipe out generational wealth, weaken household finances, and significantly reduce consumer spending, which is the backbone of the U.S. economy and GDP growth.

One key driver of the U.S. stock market is foreign investment, with investors viewing U.S. assets as a safe haven. However, foreign investors are highly reactive to returns—if other markets become more attractive, capital will flow elsewhere. Unlike American mutual funds and retirement accounts, which consistently reinvest in U.S. equities and bonds, foreign money can exit quickly during market instability.

In 2023, S&P 500 companies generated $6 trillion in foreign revenue, making up nearly 30% of total sales. This heavy reliance on foreign buyers creates significant risk. If other countries impose counter-tariffs or boycott U.S. goods, earnings could take a major hit—putting downward pressure on stock prices.

Tariffs also strengthen the U.S. dollar, but this isn’t necessarily good news. A stronger dollar makes U.S. exports more expensive, further reducing demand. For example, steel tariffs raise domestic steel prices, hurting industries like construction and automotive manufacturing. Goldman Sachs estimates that a 10% increase in the dollar’s strength could cut S&P 500 earnings by 2%.

Ultimately, the U.S. is risking a global economic backlash, and the consequences could be severe for both the stock market and the broader economy.

This analysis doesn’t even account for the impact of counter-tariffs. The U.S.’s current approach is far from ideal for its own stock market—tariffs ultimately harm either American companies, consumers, or both, creating a lose-lose scenario.

If companies choose to absorb the rising input costs, profit margins will shrink, directly cutting into their bottom line. On the other hand, if they pass these higher costs onto consumers, sales volumes will decline—especially since consumers today are financially strained. Suppliers will also feel the pressure, as companies may push them to lower prices to offset tariff costs. If that happens, many importers in the U.S. may simply stop buying foreign goods altogether, driving prices even higher.

A revealing chart highlights the issue at hand: foreign investment in the U.S. has surged at a record pace, exceeding $76 billion in the last three months alone. While this influx may seem promising, history shows that such spikes often precede major market crashes, as seen in 1987, 2000, and 2008. This signals a high level of volatility in the current market.

Another key factor to consider is China’s domestic demand. Inflation has risen due to increased holiday spending during the Chinese New Year, a time when many citizens return home and boost local consumption. Despite broader economic concerns, this trend demonstrates that Chinese consumers are still willing to spend.

In response to U.S. tariffs, China is likely to ramp up economic stimulus, instructing banks to extend more loans to both industries and consumers. Additionally, government incentives—such as trade-in programs for old vehicles in exchange for new Chinese electric vehicles—are continuously increasing. China's economy grew by 5% last year, largely due to these easing policies, proving their effectiveness.

China has also positioned itself for long-term resilience. It has built an unmatched supply chain that cannot be replicated overnight—neither in a few years nor even within a decade. The country benefits from cheap Russian energy, thanks in part to Western sanctions backfiring, and it possesses a fully integrated manufacturing ecosystem. Car manufacturers, for example, have battery suppliers nearby, while steel producers are just a short distance away, offering inputs at a substantial discount. This allows China to sustain its economy while strengthening trade within the BRICS alliance.

The U.S., meanwhile, faces increasing challenges in countering China through tariffs. China’s reliance on U.S. goods is minimal, and its domestic brands are gaining market dominance. A prime example is the coffee industry: Luckin Coffee, which offers products 30-40% cheaper than Starbucks, continues to grow, reflecting a broader nationalistic shift in consumer preferences. If this trend persists and domestic consumption surges, Chinese companies' earnings could outpace those of U.S. firms, attracting more investment to Beijing.

One final indicator of capital moving away from the U.S. is the record-breaking surge in gold prices—a clear sign of investors seeking stability outside of U.S. markets.

The world is increasingly seeking alternatives to store wealth, and gold has surged to $2,900 per ounce. Gold is essentially the anti-dollar asset—it directly competes with the U.S. stock market and bonds. Unlike fiat currencies, it cannot be printed, carries no counterparty risk, and is immune to confiscation.

Chinese gold ETF holdings have reached record levels as domestic investors pour money into gold, pulling capital away from U.S. stocks. Meanwhile, China’s central bank has resumed buying gold since November, even as prices rise, while simultaneously reducing its holdings of U.S. Treasury and agency bonds. This shift signals a growing move away from U.S. assets—an unmistakable warning sign.

The impact on U.S. bonds could be even more severe. If more countries retaliate against U.S. policies by reducing their purchases of long-term debt, such as 10-year Treasuries, borrowing costs across the economy will rise. Higher interest rates will discourage corporate expansion, potentially leading to layoffs. Consumers will also feel the strain, as expensive credit card debt and rising mortgage payments eat into household budgets.

All of these factors are converging, bringing forward a crisis that many thought was decades away. Trump’s tariff war has accelerated this timeline dramatically, introducing the possibility of major economic consequences much sooner than expected.

Ironically, this trade war could severely damage the U.S. stock market—something Trump often touted as one of his greatest achievements during his first term. Back then, he frequently boasted about record-high market levels. However, over the next four years, it seems unlikely that the stock market will experience the same kind of growth.

If a collapse does occur, Trump may attempt to stimulate the economy out of crisis. But much like the Chinese real estate collapse, a significant portion of U.S. household wealth—50-60% of households—is tied to stocks. A sharp decline in stock prices could trigger a psychological shift in consumer behavior, leading to reduced spending, declining corporate earnings, and broader economic instability.

This could create a dangerous feedback loop: falling stock prices weaken the economy, leading to recessionary pressures, and despite ongoing deficit spending, GDP could turn negative.

Buckle up—things are only going to get more unpredictable from here.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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