Surviving a Recession: Stock Market Strategies & the 2025/26 Tariff Factor

It’s definitely understandable to feel a bit uneasy when talk of a recession starts floating around. For us regular folks with investments, the big question is always, “What’s going to happen to my stocks?” Let’s break it down in a way that’s easy to digest.

Recessions and Stock Market : A Rocky Relationship

Think of the stock market as a reflection of how healthy companies are doing and how confident investors feel about the future. During a recession, which is basically a significant and widespread decline in economic activity, several things tend to happen that spook investors and hurt company profits:

• People spend less: Worried about job security or just tightening their belts, consumers cut back on buying stuff, especially non-essential items. This hits company revenues.   
• Businesses invest less: Seeing less demand or facing economic uncertainty, companies often postpone big investments, like new equipment or expansions. This further slows down the economy.   
• Profits shrink: With lower sales and less investment, company earnings usually take a hit, making their stocks less attractive.   
• Fear takes over: Uncertainty about how long or deep the recession will be leads investors to sell stocks, driving prices down.

So, generally speaking, the stock market tends to decline, sometimes quite sharply, during a recession. It’s like a domino effect – economic slowdown leads to lower profits, which leads to less investor confidence and falling stock prices.   

Looking Back: The 2000 and 2008 Recessions

To get a clearer picture, let’s peek at a couple of past recessions and how the stock market reacted:

The 2000 Recession (Dot-com Bust)

• What happened? This recession was largely triggered by the bursting of the “dot-com bubble.” Remember all those internet companies with “.com” in their name? Many had sky-high valuations without actually making much money. When investors finally realized this, the bubble popped.
• Stock market impact: The NASDAQ, heavily weighted with tech stocks, took a massive hit, falling about 78% from its peak in March 2000 to its low in October 2002. Even well-known companies like Cisco, Microsoft and Amazon saw significant drops in their stock prices.   
• Recovery time: It took a long while for the market to fully recover. The NASDAQ didn’t reach its pre-recession high until around 2015. For the S&P 500, the recovery was quicker, taking about six years to get back to its pre-recession peak.

The 2008 Recession (Global Financial Crisis)

• What happened? This one was much broader and more severe, stemming from a crisis in the housing market. Too many people with shaky finances were taking out mortgages, and when they started defaulting, it sent shockwaves through the financial system.
• Stock market impact: The S&P 500 plummeted by about 57% between its peak in October 2007 and its low in March 2009. Major financial institutions were hit hard, and the crisis spread globally, impacting almost all sectors.
• Recovery time: The recovery from the 2008 recession was also lengthy. It took the S&P 500 about five and a half years to get back to its pre-crisis high. 

Popular Stock Examples:

• During the 2000 recession, tech giants like Microsoft and Intel saw their stock prices fall significantly, even though they were fundamentally strong companies. Microsoft traded near $60 in 1999 and didn’t hit that price again until 2016. That’s a long time to see a return. Of course, right after that Microsoft soared under new leadership but that example shows that even a marquee name like that can take a while to make you money and many companies in the dot com bubble just never recovered or ceased to exist entirely.
• In the 2008 recession, financial stocks like Citigroup and Bank of America experienced dramatic declines due to their involvement in the mortgage crisis. Even strong non-financial companies like General Electric saw their stock prices tumble as the broader economy suffered and many other companies saw a reduction in price even if they weren’t directly related to the real estate market as the financial impact was widespread.

What About 2025 or 2026?

Predicting the future is always tricky, especially when it comes to the economy and the stock market. However, if we were to face a recession in 2025 or 2026, we could expect some similar patterns, though the specifics would depend on what triggers the downturn.

Potential Scenarios:

• Initial Drop: We’d likely see a significant drop in the major stock market indices (like the S&P 500, Dow Jones, and NASDAQ) as investors react to the news and uncertainty. We’re already seeing some of that as the actions of the current administration add a lot of question marks to the U.S. stock market and the worldwide economy.
• Sector Impact: Some sectors would probably be hit harder than others. For example, if the recession is driven by a decrease in consumer spending, companies that sell discretionary goods (like travel, entertainment, and luxury items) might see a bigger impact. On the other hand, companies that provide essential goods and services (like healthcare and consumer staples) might hold up relatively better although increased costs might impact those negatively as well.  
• Individual Stock Performance: Even within a sector, the performance of individual stocks would vary depending on the company’s financial health, debt levels, and how well they can weather the economic storm. Stronger companies with solid balance sheets might see their stock prices decline less and recover faster. They might also get some opportunities to acquire companies at good valuations which would help their long term business prospects.
• Recovery Timeline: The length of the recovery would depend on how deep and how long the recession lasts, as well as the government’s response (like fiscal stimulus or changes in interest rates). It could be a relatively quick bounce-back, or it could take several years to fully recover to pre-recession levels.

The Tariff Wildcard: Amplifying Recessionary Pressures?

As we’ve seen in recent times, tariffs can act as a major destabilizing force in the economy and the stock market. If a recession were to coincide with new or escalating tariffs in 2025 or 2026, the negative effects could be amplified:

• Increased Costs, Reduced Profits: Tariffs essentially act as a tax on imported goods. This directly increases costs for businesses that rely on imported components or materials. In a recessionary environment where demand is already weak, companies might find it harder to pass these increased costs onto consumers, leading to squeezed profit margins and potentially lower earnings. This would make their stocks less attractive.
• Supply Chain Disruptions: Tariffs can incentivize companies to shift their supply chains away from countries facing high tariffs. This can lead to costly and time-consuming restructuring of operations, potentially causing disruptions in production and delivery, further hurting revenues and investor confidence.
• Trade Wars and Retaliation: One of the biggest risks of tariffs is the potential for retaliatory measures from other countries. If major trading partners impose their own tariffs on U.S. goods, this would negatively impact U.S. exports, further weakening economic growth and hitting the stock prices of export-oriented companies.
• Consumer Spending Hit: Higher costs due to tariffs can translate to higher prices for consumers. In a recession, where people are already cutting back on spending, these price increases could further dampen demand, leading to a vicious cycle of lower sales and economic contraction.
• Increased Uncertainty and Volatility: Tariffs and the potential for trade disputes create a significant amount of uncertainty in the market. Businesses struggle to plan for the future, and investors become more risk-averse, often leading to increased stock market volatility and potentially sharper declines.

Potential Tariff Scenarios in 2025-2026 and Stock Market Implications

Given the current global trade landscape as of April 2025, here’s some interesting scenarios involving tariffs and their potential impact on the stock market during a 2025-2026 recession:

Scenario 1: Existing Tariffs Persist, No New Major Escalations

• Even without new tariffs, the existing ones could exacerbate a recession. Companies already dealing with weaker demand would continue to face higher input costs, potentially leading to lower profitability and slower recovery in their stock prices. Sectors heavily reliant on imports, like electronics and automobiles, might underperform as we’ve already seen.

Scenario 2: Targeted New Tariffs in Specific Sectors

• Imagine tariffs being imposed on specific goods or from particular countries. This would disproportionately impact companies within those sectors or with significant exposure to those regions. For example, new tariffs on Chinese electronics could further pressure tech companies already facing recessionary headwinds. Stock prices in those targeted areas could see sharper declines and slower recovery.

Scenario 3: Broad, Across-the-Board Tariff Increases

• This would be the most damaging scenario. If widespread tariffs were implemented during a recession, it could significantly stifle global trade, raise inflation, and severely depress consumer and business confidence. The stock market would likely experience a much steeper and more prolonged downturn. Even fundamentally strong companies like Apple and Amazon would face significant challenges due to higher costs, disrupted supply chains, and weaker global demand, leading to potentially larger stock price drops and a longer road to recovery.

Scenario 4: Partial Rollback of Some Tariffs

• On the flip side, if there were a move to reduce or eliminate some existing tariffs in response to a recession, it could provide a positive boost to the market. Lower costs for businesses and potentially lower prices for consumers could help stimulate economic activity and improve investor sentiment, leading to a faster stock market recovery. I do think this is the most likely outcome of this scenario but it remains to be seen how long this takes and how our relationships with other countries are impacted.

Recovery Time with Tariffs:

The presence of significant tariffs during a recession in 2025 or 2026 could very well prolong the recovery time for the stock market compared to a recession without such trade barriers. The added costs, uncertainties, and potential for trade disputes could create a more challenging environment for businesses to rebound and for investor confidence to return.

Let’s just imagine some popular stocks and how they might fare:

• Apple (AAPL): If consumer spending takes a big hit, people might delay buying new iPhones or other gadgets, potentially impacting Apple’s revenue and stock price. However, their strong brand loyalty and ecosystem could help them weather the storm better than some other consumer electronics companies. Still, higher tariffs on components from Asia could increase production costs, potentially squeezing margins and leading to higher prices for consumers, dampening demand. A trade war could also impact their ability to sell items in other countries like China if that country places barriers on certain items from the United States.
• Tesla (TSLA): As a higher-priced discretionary item, Tesla’s sales could be more sensitive to a recession. Additionally, factors like competition in the EV market and overall economic confidence could play a significant role in its stock performance. Tariffs on battery materials or components could raise the cost of their vehicles, making them less competitive, especially in a recessionary environment where consumers are more price-sensitive. Additionally, tariffs imposed by other countries on U.S.-made EVs could hurt their export sales. On top of that, the perception of the company due to actions of Elon Musk could be damaging to revenue in the long term.
• Amazon (AMZN): While people might cut back on some online shopping, Amazon’s role in essential goods and its cloud computing business (AWS) could provide some resilience. However, a broader economic slowdown would likely still impact its overall growth. While their cloud business might be somewhat insulated, tariffs on imported goods sold through their platform could lead to higher prices and reduced sales volume, impacting their e-commerce revenue. Other business may delay or cancel their implementation of cloud changes which could impact the AWS business as well.

Important Note: These are just hypothetical examples, and the actual performance of these or any other stocks during a future recession could be very different.

The Takeaway

Recessions and the stock market definitely have a bumpy relationship. Stock prices usually fall during these periods due to decreased economic activity, lower company profits, and increased investor fear. Looking at past recessions like 2000 and 2008 shows us that these downturns can be significant and the recovery can take time.

If a recession were to occur in 2025 or 2026, we’d likely see a similar pattern of market decline, with the severity and recovery time depending on the specifics of the economic situation. While it can be unsettling to watch your investments go down, it’s important to remember that market downturns are a normal part of the economic cycle, and historically, the market has always recovered over the long term. Staying informed, having a well-diversified portfolio, and focusing on your long-term investment goals are generally good strategies to navigate such times.

Still, a recession maybe mean a multi year reduction in portfolio value so investors have to be cognizant of that fact and invest with a longer term mindset. If a company like Microsoft can take more than a decade to recover then most companies can be impact especially at the higher than average valuations we’re still trading at in the market.

Tariffs are a significant variable to consider when thinking about a potential recession in 2025 or 2026. They have the potential to amplify the negative impacts of an economic downturn on the stock market by increasing costs, disrupting supply chains, fueling trade tensions, and dampening consumer spending. The specific impact would depend on the scope and nature of the tariffs implemented, but it’s reasonable to expect that their presence could lead to a more severe stock market decline and a longer, more challenging recovery period. Investors would need to closely monitor trade policies and their potential ramifications on individual companies and sectors.

Looking at the more limited 2018 trade war with China, stocks traded at depressed levels for the entirety of that period and didn’t start to rise consistently until the trade war ended around the end of 2019.

Another item of note is how these actions impact our relationships with other countries and their citizens. The U.S. stock market has historically been seen as a save haven for investment dollars and that seems to be changing now with the current administrations actions. If other countries choose to invest their dollars elsewhere and their citizens choose to avoid American products, that could have a negative and disproportional impact on the U.S. stock market.

While the market will likely recover in the long term, the current historically high valuations make for a more risky investment cycle than in prior recessions and the timeline to recovery might be longer if a recession were to occur. Still, investing with a long long-term mindset is a good way to build wealth and a diversified portfolio is the way to do that.

As always, here’s the disclosure! This is not investment advice, I own AMZN and may own other stocks discussed in this article in the near future. Investment comes with risk of loss and you should talk to a qualified investment professional before investing your money.