Market Commentary - Tariff Talk
By Chad Roope, CFA ®, Chief Investment Officer
U.S. tariffs set to be imposed on imports from Canada, China, and Mexico – ranging from 10% to 25% – and suggestions of forthcoming tariffs on the European Union mark a sharp escalation in trade protectionism. This shows that tariffs will be a key policy tool for the new U.S. administration, as telegraphed during the presidential campaign. The effective rate of U.S. tariffs will be close to 1930s levels if fully implemented. The 10% tariffs could be the new baseline for the U.S. to earn tax revenue, while 25% may prove to be used more as leverage in negotiations – as seen in the decision to delay tariffs on Mexico for a month. But uncertainty is high. What’s key for markets is how long 25% tariffs last: the longer they hold, the more permanent the supply chain shifts. Legal challenges could delay implementation and add to market volatility. How countries retaliate is also important – and could draw further U.S. escalation. These actions – and their ripple effects – could dent corporate and investor confidence.
The broader economic implications could be more significant than the direct effects. Prolonged tariffs, as proposed, could hurt growth and add to inflation. We already thought loose fiscal policy and supply constraints – like an aging workforce – would keep inflation above the Federal Reserve’s 2% target. That leaves the Fed limited flexibility if growth slows. Another implication: a likely reassessment of supply chains. Like the U.S., Canada, and Mexico are positioning tariffs as a matter of national security, urging consumption of non-U.S. goods and limiting reliance on cross-border trade.
In markets, we think U.S. equities could be volatile in the next few months as investors seek additional compensation for these risks. Yet we think volatility could impact the ultimate extent of tariffs, as seen during the first administration of President Donald Trump. More broadly, resilient economic growth, solid corporate earnings, potential deregulation, and the AI mega force keep us positive on U.S. stocks over a six- to 12-month view. Markets could eventually adjust to a new regime of 10% tariffs if growth stays solid and inflation is contained. We plan to maintain our bias toward quality U.S large-cap stocks as we think they can keep doing well given strong balance sheets, earnings resilience, and their central role in the AI buildout. We also think bonds could do well in 2025 with yield in the 5% plus range and the Federal Reserve in a holding pattern. We think patience and diversification will play an important role for positive outcomes in 2025.
Source: BlackRock Investment Institute “Tariffs Signal Global Trade Shift”
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