Here’s why investors need to watch the trade balance and how rapid shifts impact the stock market

Since Donald Trump retook the White House, the trade balance of the US has been given more prominance – and by extension the concept of trade balances generally. In January 2025, a month Trump slapped tariffs on many of America’s trading partners, America’s deficit is US$131.4bn, a figure that is an all-time high, up 34% in a month and increased by the greatest extent in a decade. Australia has a surplus of A$5.62bn, a figure $0.7bn up in a month, but down over $4bn from 12 months ago. How did this happen? We’ll get to that, but first let’s explore why trade balances matter.

What is the trade balance?

The trade balance is the difference between the value of a country’s exports and the value of its imports over a specific period of time. It is a key indicator of a country’s economic health and is part of its balance of payments.

A surplus occurs when a country exports more goods and services than it imports, meaning it has a positive trade balance. A deficit occurs when a country imports more goods and services than it exports, meaning it has a negative trade balance.

The trade balance is often used to analyse a country’s economic performance, its currency strength, and its trade relations with other nations. A trade surplus might indicate that a country is producing more than it is consuming, which could lead to a stronger currency. On the other hand, a trade deficit might suggest a reliance on foreign goods and services, potentially weakening the domestic currency over time.

How they can impact stocks?

Trade balances can have a significant impact on the stock market because they provide insights into a country’s economic health and influence investor sentiment. Here’s how trade balances (surplus or deficit) can affect the stock market:

As an answer to the question of whether a country is exporting more than it imports or imports more than exports, it is a major economic indicator. A surplus suggests that local businesses are competitive internationally, and the economy is growing or in a strong position. A trade surplus tends to boost demand for the country’s currency, as foreign buyers need it to pay for exports. A stronger currency can reduce the cost of imports, which might help lower inflation, benefiting companies with international operations. Companies involved in export activities (e.g., manufacturing or infant formula companies selling goods abroad) might see their stock prices rise due to higher demand for their products in international markets.

On the other hand, A trade deficit, where imports exceed exports, might be seen as a sign that a country is relying too much on foreign goods and services. This could indicate economic weakness, especially if the deficit is widening over time. It can lead to downward pressure on the country’s currency since there’s less demand for the currency to pay for imports.

A weaker currency can increase the cost of imports, leading to inflationary pressures. This can negatively impact domestic companies that rely on foreign raw materials or components. Companies in sectors heavily reliant on imported goods or materials (e.g., technology, automotive) may see their costs rise, which can hurt profitability and lead to lower stock prices. Additionally, a prolonged trade deficit could lead to concerns over a country’s foreign debt, especially if it is borrowing to finance its trade deficit. If investors believe a country may struggle to repay its debts, the stock market could react negatively.

When specific data is realised, it can impact investor perceptions and cause indice movements, including in the ASX 200. If a trade balance report (surplus or deficit) is better or worse than expected, it can cause market volatility. But over the long term, persistent trade deficits can weaken a country’s economic fundamentals, leading to concerns about sustainable growth and financial stability. This could have a negative impact on the stock market in the long run, especially for countries with large deficits.

Trade wars

Trade imbalances are often linked to political issues such as trade wars or tariffs. If a country faces tariffs or other trade barriers due to a trade deficit, this could disrupt international supply chains and negatively affect the stock market.  In a globalized economy, a country’s trade balance is also influenced by the economic health of its trading partners. A large trade deficit with one country may have ripple effects on global markets, depending on the scale of the economic interactions.

President Trump is keen, no doubt, to reduce his country’s deficit, but the deficit has thus far grown higher – it has surpassed US$131bn and grown 34% in the first month of 2025. Imports soared the most since July 2020 to US$401.2bn, mostly driven by an increase in imports of industrial supplies and materials. You could argue this was due to fears of the tariffs before they were implemented – particularly for gold.

Exports rose 1.2% to US$269.8bn, mostly reflecting capital goods such as for semiconductors, aircraft and computers. Over time, the hope is that the US will correct the imbalance by increasing exports and reducing imports. The tariffs may do the latter, but it ought to be remembered that it is a two way equation.

Turning to Australia, and its most recent trade balance was an A$5.6bn surplus. This was lower than the $9.4bn recorded 12 months prior, but ahead of the A$4.9bn figure recorded 1 month prior. Exports totalled $44.5bn, whilst imports totalled $38.9bn. $9.6bn of those exports were iron ore and $6bn were from coal, with another $4.7bn coming from natural gas

Conclusion

While trade balances are just one factor that can influence the stock market, they offer important clues about the health of a nation’s economy and its position in the global marketplace. Investors tend to favor countries with strong, balanced trade positions (or surpluses) because they are generally seen as more stable and less dependent on external factors. Conversely, countries with persistent trade deficits may face more economic challenges, which can lead to market volatility and lower stock prices in some cases.

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