We expect a contraction marked by production shutdowns, bottlenecks and shortages like during the pandemic – though spending on services won’t be as directly affected. Activity may also restart quickly as it did during the pandemic. These supply-driven elements could bolster the inflationary pressure from tariffs, building on already high inflation. That presents the Fed with a sharper trade-off between protecting growth by coming to the rescue with rate cuts and reining in inflation. We track a range of indicators – like port traffic, capital spending plans and high-frequency financial and consumer spending data – to monitor how the supply-driven shock ripples out. This reinforces the hard economic rule that supply chain dependencies can’t be rewired quickly without disruption. If these rules constrain negotiations, damage could be limited.
A sectoral story
Some sectors are more exposed to tariffs than others – with sectoral differences already at play in Q1 earnings reports. The companies at the forefront of the AI mega force have largely kept driving U.S. equity strength, while policy uncertainty weighs more heavily on the rest of the market. Some big tech companies have beat Q1 earnings expectations, noted surging AI-driven demand and announced plans to increase AI-related investment. That underscores how the AI mega force persists, even with major supply-driven disruptions – keeping us positive on developed market (DM) stocks, especially the U.S. On the flip side, automakers are among the most exposed to key supply inputs from China, with some flagging the impact of tariffs in their full-year earnings guidance. The longer policy uncertainty lasts, the deeper the damage could be.
We have evolved our views as markets have adjusted to uncertainty. Just two days after April 2, we reduced risk by cutting our tactical horizon to three months. Yet the 90-day tariff pause showed economic rules can spur changes in policy. That led us to return our tactical horizon to six to 12 months to dial up exposure to developed market stocks. On a longer-term horizon, key questions remain about the best way to tap into an economic transformation, if investor bias for domestic assets will prevail, the outlook for the U.S. dollar’s haven status, and investing in private markets amid structurally higher interest rates.
Our bottom line
We expect tariffs at current levels to spur a supply-driven contraction this year, while supply disruptions boost inflation. The AI theme keeps us positive on DM stocks, especially the U.S., though more volatility is likely ahead.
Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a U.S. dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.