Markets tumble on tariff announcement: What investors need to know

In this article, we review:

• A summary of President Trump’s newly imposed tariff policies as announced on April 2
• Potential impacts to U.S. economic growth, inflation, and the future path of interest rates
• Expected impacts to the equity and fixed-income markets 
• Adjustments to our CY 2025 economic and market forecasts 

President Trump’s tariff announcement on April 2 represented more widespread and aggressive terms than most had expected and resulted in sharp equity market declines in immediate trading thereafter. Specific tariff measures put forth in the announcement included:

• A baseline (minimum) tariff rate of 10% on all nations, with the additive feature of additional amounts on an individualized country basis. This was a good bit more far-reaching than markets had expected.
• As a result, reciprocal tariff levels on a global basis were materially higher than market expectations and range from 10% to 49%. Initial global weighted average calculations have been estimated at approximately 29% (ISI Evercore). Most expectations had been for a flat rate in the 10%–20% range. 
• Tariff rates for the European Union and Japan were announced at 20% and 24%, respectively. Canada and Mexico will retain their previously announced tariff rates of 25%, and India will be imposed a rate of 26%. The highest rates include Vietnam at 46% and Cambodia at 49%.
• For China, its newly announced reciprocal tariff rate of 34% was added to its previously imposed rate of 20% for a total amount of 54%. 
• Tariff levels of 25% were imposed on all foreign-produced autos, a move generally expected by the markets.

In addition to previous expectations of lower and less-expansive tariffs, markets had been hoping for guidelines of a less complicated and more transparent global trading playing field, perhaps with unified or more tightly categorized rates allowing for more visibility regarding corporate and consumer financial decision-making. However, given this more individualized country-by-country platform, markets appear to have interpreted the news as providing less clarity, combined with the higher-than-expected rates. 

Taking these developments into account, we now believe U.S. economic growth is likely to slow in the year ahead, though remain positive. We also now see core inflation rates as more probable to rise than decline. When netting out the Federal Reserve’s dual mandate of maximizing employment and fighting inflation, we see Chair Jerome Powell and his colleagues more likely to lean toward preventing economic contraction, therefore resulting in lower interest rates across the yield curve as the year moves forward.

Specific adjustments to our economic and market forecasts for CY 2025 include:

• We believe gross domestic product (GDP) is now more likely to finish the year in the range of 1.0%–1.5%, rather than our beginning-of-the-year forecast of 2.5%.
• We now see the core rate of inflation, as defined by the combined average of Consumer Price Index (CPI) core inflation and Personal Consumption Expenditures (PCE) core inflation, as likely to conclude the year at approximately 3.25%, up from our previous expectation of about 2.75%.
• We believe the Federal Reserve is now more likely to implement three quarter-point rate cuts in CY 2025, concluding the year with a fed funds target range of 3.50%–3.75%, and we see a realistic year-end 10-year Treasury bond yield to be approximately 4.00%. 
• We are reducing our year-end price target on the S&P 500 to 6,200, from our previous level of 6,500.

The overall tariff environment is likely to remain fluid, with the potential for breaking information at any time, and therefore continuing to add volatility to the markets. Upside catalysts for stocks between now and year-end should still include tax legislation, deregulation, and a lower interest rate environment, though for at least the upcoming few months, these developments will likely take a back seat to ongoing tariff drama. 

Given what we now believe to be a comparatively lower interest rate backdrop — but potentially widening credit spread — than previously anticipated, we continue to favor investment-grade bond portfolios ranging from the short- to intermediate-term slope of the yield curve, as such higher quality portfolios should be better positioned for the more volatile environment. We believe that stocks can still experience upside between now and year-end, though any upside is likely to be back-weighted toward 2H 2025 as more equity volatility is likely in the immediate months ahead. 

2025 year-end forecasts

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