Weekly market commentary

Broadening uncertainty
U.S. economic policy uncertainty index, 1990-2025

Long-standing global trade and foreign policy frameworks are being upended as the U.S. has raised tariff rates and catalyzed big policy responses elsewhere. Current levies on steel and aluminum, auto import tariffs revealed last week and details on “reciprocal” tariffs due April 2 are in focus now. We think the average U.S. effective tariff rate will settle near 10% – but it could take months to get there. Until then, we expect multiple changes to the mix of tariff rates. Investors have not faced this kind of trade uncertainty for decades and it has morphed into elevated economic uncertainty. See the chart. Unusually high policy uncertainty is driving a wedge between data based on sentiment surveys and data based on actual activity: U.S. consumer confidence hit a four-year low in March, even as activity holds up.

We think policy uncertainty will ease over the next year. Yet prolonged uncertainty increases the risk weakening sentiment hurts growth. At this stage, it’s hard to forecast the policy outcomes with any confidence given many moving parts and competing objectives. We think it’s more useful to assess the orders of magnitudes across different policy outcomes and how they could be reconciled: We assess growth, inflation and deficit impacts across trade, fiscal and immigration policy using a range of external estimates. On trade, we think tariffs are set to be a permanent feature of U.S. trade policy and a tool to raise revenue. While some external estimates see $300 billion in annual revenue from tariffs, they will likely push up on inflation and weigh on growth. The government is also aiming to cut costs to save around $1 trillion per year but nearing that would mean deep cuts to major federal programs. External estimates project only up to $300 billion of savings each year.

Assessing the policy mix

Yet those revenue gains could be offset by proposed policies that imply lower government revenues. The U.S. administration has proposed a continuation of the 2017 Tax Cut and Jobs Act that set out tax cuts for individuals and businesses and is due to expire in 2026. A continuation would widen the fiscal deficit by up to $450 billion, the Congressional Budget Office and Joint Taxation Committee project, while also providing a small boost to growth and inflation. The administration has also made it a priority to reduce net immigration. If immigration slows back to pre-pandemic levels, currently elevated wage pressures would likely persist, GDP growth would slow slightly, and tax revenues would fall a little.

We expect this policy mix to reinforce persistent inflation pressures and higher long-term yields – and leave the fiscal deficit above 5% looking out to 2030. What matters for risk assets amid higher rates: whether growth can hold up. We see a path where it could if the AI growth boost of the past two years persists and if deregulation spurs an additional boost. We think U.S. stocks can resume their global leadership due to resilient growth and mega forces – like AI. We stay underweight long-term U.S. Treasuries, favoring short- and medium-term bonds.

Our bottom line

U.S. policy shifts have conflicting economic impacts. We see a path for resilient growth and mega forces to support U.S. equities, keeping us overweight tactically. We stay underweight long-term bonds, preferring shorter-term bonds.

Market backdrop

The S&P 500 slid 1.5% last week before the April 2 U.S. tariff announcement. Europe’s Stoxx 600 fell more than 1% last week, in part reflecting the news of U.S. tariffs being levied on global auto imports. But Europe is still outperforming this year, with gains of nearly 7% compared with the S&P 500’s 5% drop. U.S. 10-year Treasury yields ended the week flat at 4.25%, falling back from one-month highs after soft U.S. consumer spending data for February.

This week all eyes are on the U.S. administration’s planned April 2 date to release more details about “reciprocal” U.S. tariffs that match many of those imposed on U.S. products by other countries. The much higher rates currently planned for Mexican and Canadian imports and on autos globally could be cut after negotiations, while new ones could be introduced elsewhere. We think the average U.S. effective tariff rate will ultimately settle near 10%, the highest since the 1940s.

Read our past weekly commentaries here.

Big calls

Our highest conviction views on tactical (6-12 month) and strategic (long-term) horizons, March 2025

Tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, March 2025

Our approach is to first determine asset allocations based on our macro outlook – and what’s in the price. The table below reflects this. It leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns. The new regime is not conducive to static exposures to broad asset classes, in our view, but it is creating more space for alpha. For example, the alpha opportunity in highly efficient DM equities markets historically has been low. That’s no longer the case, we think, thanks to greater volatility, macro uncertainty and dispersion of returns. The new regime puts a premium on insights and skill, in our view.

Euro-denominated tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, March 2025