Should You Buy Stocks With the S&P 500 Falling on Tariff Fears? Warren Buffett Has Brilliant Advice for Investors.

The Tax Foundation estimates tariffs imposed by the Trump administration will raise the average tax on U.S. imports to 8.4%, the highest level since 1946. While some duties may be short-lived negotiating tactics meant to fix trade imbalances, certain countries have already taken retaliatory action that could hurt the economy.

Last week, economists at JPMorgan Chase and Goldman Sachs revised their recession probability forecasts higher, and President Donald Trump declined to rule out the possibility of an economic downturn. That uncertainty has led to a rotation away from U.S. stocks, especially in the technology and consumer discretionary sectors.

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The broad-based S&P 500 (SNPINDEX: ^GSPC) and the technology-focused Nasdaq Composite (NASDAQINDEX: ^IXIC) recently fell into correction territory, meaning both indexes had declined at least 10% from their record highs. Should investors buy the dip? Or is the stock market best avoided as tariffs take effect?

Consider this advice from Warren Buffett.

Buffett says tariffs are an act of war, but he remains bullish on American business

Warren Buffett during a recent CBS interview declined to comment on trade policies specific to the Trump administration. However, he did characterize tariffs as an economic "act of war, to some degree" and warned of the consequences. "Over time, they are a tax on goods," he said.

Companies usually pass those cost increases along to buyers, which means tariffs cause inflation. And rising prices could certainly hinder economic growth. In fact, a forecasting model from the Federal Reserve Bank of Atlanta shows U.S. GDP declining at an annualized 2.4% in the first quarter. That would be the first drop in more than four years.

Yet, Buffett remains bullish on American business. "A majority of any money I manage will always be in the United States," he told CBS. That is particularly interesting because major stock market indexes across Europe and Asia have notched strong gains year to date, while the S&P 500 (the U.S. benchmark) has dropped into correction territory.

Here's the bottom line: While diversifying into international stocks is sensible to some degree, investors should bear in mind the U.S. economy is the largest and arguably the most innovative economy in the world. Indeed, 17 of the 20 largest companies by market value are U.S. companies. Buffett in 2021 warned investors, "Never bet against America," and that advice is still relevant.

Image source: Getty Images.

Tariffs fears have rattled the stock market, creating a buying opportunity for patient investors

The S&P 500 and Nasdaq Composite have eventually rebounded from every market correction, meaning every drawdown has ultimately been an opportunity to buy quality stocks at a discount. Buffett made that point in his 2013 shareholder letter: "A climate of fear is your friend when investing; a euphoric world is your enemy."

Admittedly, U.S. stocks may continue to fall in the coming weeks and months if the trade war instigated by the Trump administration continues to escalate. Nevertheless, history says the market will recover, so investors should seize opportunities as they arise. That means buying high-conviction stocks as the market falls. What investors should not do is attempt to time the bottom.

Market-timing strategies can have catastrophic results because momentum shifts quickly. Buffett in 2008 wrote:

I can't predict the short-term movements of the stock market. I haven't the faintest idea as to whether stocks will be higher or lower a month or a year from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up.

Finally, investors should strive to make rational decisions rather than reacting emotionally. Buffett in 2017 wrote:

There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren't immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions.

Here's the bottom line: No one knows how far the stock market will fall as tariffs impact the economy, nor do they know how long the downturn will last. But investors should be encouraged by the historical resilience of the U.S. stock market. That the S&P 500 and Nasdaq Composite have always recouped their losses suggests long-term investors can put money into the stock market with confidence today.

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JPMorgan Chase is an advertising partner of Motley Fool Money. Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group and JPMorgan Chase. The Motley Fool has a disclosure policy.