Weekly market commentary

Targeting deficits
Ten largest bilateral U.S. trade deficits, 2024

The U.S. has paused country-specific “reciprocal” tariffs on all nations, except China, for 90 days and exempted some key tech imports. These tariffs are intended to create negotiating leverage on countries with which the U.S. runs goods trade deficits – and reduce imbalances. See the chart. Even with the pause, the U.S. average effective tariff rate is still around 20%, including 145% tariffs on select Chinese imports. We see U.S. tariffs adding to inflation. Prolonged uncertainty raises the risk of recession. It may drag on corporate investment and delay longer-term commitments. Consumer spending could be hurt by any erosion of wealth and real incomes. Dented confidence in the U.S. could curb foreign investor appetite for U.S. assets. Trade tensions with China are set to deepen. We see tariffs lowering growth in China, and potential policy stimulus only partly offsetting that drag.

Along with country-specific tariffs, we see two other primary types of U.S. tariffs. First, tariffs on strategic sectors to support reshoring of activity. Second, a universal 10% tariff on most imports to generate revenue and aid domestic production. Even with last week’s pause – and subsequent exemption of some key tech imports such as smartphones – the U.S. is still facing much higher tariffs than we expected a few weeks ago. With uncertainty around where tariffs will land and unpredictable negotiations ahead, we aim to understand the factors that can prompt the administration to change course on policy. It appears to be taking some account of market volatility, financial risks and other sources of pushback, as well as a country’s willingness to engage. That is putting a check on its maximal stance and could bind policy changes.

Checks on policy emerge

The implications? The near-term risk of a financial accident has eased. We cautiously leaned back into risk late last week by extending our tactical horizon back to six to 12 months from three months. We also renewed our overweight to U.S. and Japanese stocks. U.S. equities are supported by the AI theme, resilient corporate earnings and a so far solid economy. We see Japanese stocks still benefiting from stronger corporate profits and shareholder-friendly reforms. We recently upped Europe’s stocks to neutral but focus on selective opportunities while looking for more progress on structural challenges.

Yet we expect ongoing risk asset volatility and potentially sharp reversals. Spiking yields in long-term U.S. Treasuries seemed to be a factor in the change in tariff tactics. We stay underweight long-term Treasuries, our highest conviction view: tariffs are likely to add to already sticky inflation, and congressional budget plans last week reinforce the outlook for persistent budget deficits. We favor gold instead as a portfolio diversifier. The broad-based equity selloff has created opportunities to tap into certain sectors, and selectivity is key. We still like U.S. technology benefitting from the AI buildout and adoption. We also favor global banks. That includes U.S. banks given the scope for deregulation even with some potential economic pain. We also like banks in Europe (higher rates versus pre-pandemic levels) and Japan (stronger loan growth).

Our bottom line

The U.S. paused most “reciprocal” tariffs even as U.S.-China trade tensions look set to deepen. Checks on policy allowed us to extend our tactical horizon back to six to 12 months and resume our positive view on U.S. and Japanese stocks.

Market backdrop

Markets have endured extraordinary volatility due to uncertainty over U.S. tariffs. The S&P 500 rebounded nearly 6% last week, with one of its largest daily jumps in its history after the pause on “reciprocal” tariffs. But the index remains 13% below its February record high. The U.S. dollar tumbled to three-year lows against major currencies even as both 10- and 30-year U.S. Treasury yields spiked about 50 basis points to 4.50% and 4.90% – on track for their largest weekly rise in four decades.

We expect the European Central Bank (ECB) to cut interest rates at its policy meeting this week. What seemed to be a toss up between a cut and a hold before the announcement of additional U.S. tariffs on April 2 will most likely be a cut, as sweeping tariffs risk pushing the bloc towards recession. We expect tariffs to lower growth in Europe, yet greater fiscal spending could limit the drag from tariffs.

Big calls

Our highest conviction views on six- to 12-month (tactical) and over five-year (strategic) horizons, April 2025

Tactical granular views

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

We have lengthened our tactical investment horizon back to six to 12 months. The table below reflects this and, importantly, leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns – especially at a time of heightened volatility.