Sizing up a major macro policy pivot

A supply-driven transformation

Financial markets are being shaped by a supply-driven regime: Mega forces like artificial intelligence (AI) and geopolitical fragmentation are transforming economies and replacing traditional business cycles as key market drivers. These forces could push the global economy in vastly different directions, creating a kind of uncertainty investors haven’t faced in decades.

In our 2025 Global Outlook, we flagged that public policy could go from having a stabilizing market effect to a destabilizing one. That is playing out: post-war global trade and foreign policy frameworks are being upended, with a cascading effect around the world. The shift in U.S. foreign policy is already catalyzing policy responses elsewhere, especially in Europe and Canada.

A global trade shake-up

The U.S. administration has embarked on an historic path to reshape global trade, aiming to bring jobs and revenue to the U.S. Tariffs and non-tariff measures have a direct and, in most cases, immediate impact on costs, making imported goods and raw materials more expensive. The result? Higher inflation in the near term. If policy uncertainty lingers, inflation pressures could persist as shifting tariffs and trade barriers drive up business costs, prompting precautionary price hikes.

We see tariffs becoming a permanent fixture of U.S. trade policy. A mix of rates is likely, with some countries and sectors facing steeper levies than others. But in aggregate, we expect the average U.S. effective tariff rate to settle near 10% — its highest since the 1940s.

Assessing the wider policy mix

As well as trade, changes to U.S. immigration and fiscal policy will also be key to the economic outlook. The many moving parts make it hard to forecast a U.S. policy landing zone with any confidence at this stage. We think it is more useful to assess the orders of magnitudes involved across different dimensions and how they can be reconciled. We use a range of external estimates to assess the combined growth, inflation and deficit impacts of those three policy areas.

External estimates suggest cost-cutting in federal departments could save around $300 billion annually. Getting anywhere close to $1 trillion annually would require deep cuts to major programs. Tariffs could raise up to $300 billion per year, assuming the dollar strengthens enough to maintain import levels. If not, and if more production moves onshore, revenues would be lower. An immigration slowdown could cut tax revenues by $30-100 billion, slow growth and push up wages. A continuation of the Tax Cuts and Jobs Act would boost growth and modestly raise inflation but add $450 billion in annual financing needs.

Looking out to 2030, this mix is likely to leave the fiscal deficit above 5% and long-term yields higher. If the AI growth boost of the past two years continues and deregulation provides an additional boost, we think annual U.S. growth of around 2.5% or more is feasible, even with 10% average tariffs. Getting the deficit down to the administration’s proposed 3% target would require a primary balance surplus via further spending cuts. This by itself would drag on growth by roughly 1.5%, we estimate. Keeping growth above 2% would then require an even bigger boost from AI and deregulation – one that would put the share of private investment at triple its historical average.

Staying pro-risk

Policy uncertainty is the main near-term market driver. We expect higher long-term bond yields to persist globally and stay underweight long-term U.S. Treasuries. As policy uncertainty eases later this year, we see a path to U.S. equities resuming their global leadership, driven by around 2% annual U.S. GDP growth and mega forces. We think this is an environment favorable to taking risk – but actively, by being selective and nimble. Greater volatility can broaden the range of returns, creating opportunities for above-benchmark returns, in our view.