Tariff uncertainty: Impacts on markets and portfolios

Key takeaways

• U.S. President Trump initiated a wave of new tariffs on April 2^nd on what has been termed ‘Liberation Day’ – his largest tariff action to date. The administration views tariffs as part of a broad economic reset that will ultimately pay off for American businesses and workers.
• On April 9th, President Trump paused the extra “reciprocal” tariffs on most countries for 90 days, set a 10% universal tariff, and raised the tariff on Chinese imports.
• The escalation in trade tensions and trade policy uncertainty has triggered a spate of stock market volatility, which we believe could persist.
• Volatility cuts in both directions, making it important to stay invested. Many of our investors see opportunity in building additional diversification into portfolios and staying nimble to take advantage of price dislocations.

The scale of President Trump’s tariff announcements on April 2^nd exceeded economist and market expectations, sending the S&P 500 down over 10% in the two days immediately following.¹ And while markets rallied following the April 9^th announcement of a 90-day pause of reciprocal tariffs (excluding China), significant uncertainty remains.

How tariffs could affect investments

We expect tariffs to lower growth and boost inflation globally. Our Fundamental Fixed Income team, for example, has lowered its 2025 GDP growth expectation to 0% and raised its core inflation expectation to 3.8%.²

Michael Gates, lead portfolio manager of the BlackRock Target Allocation Model Portfolios, estimated that a 20% effective tariff increase could have a 2-to-2.5% downward impact on growth: higher goods prices reduce activity, the negative “wealth effect” could drive lower consumer spending, and reduced corporate confidence and delayed decision making could all drag on growth. Depending on the starting economic growth rate and ultimate tariff rate, the hit to growth could be enough to cause a shallow recession.

We are paying close attention to two key questions as we try to make sense of how uncertainty could play out in portfolio allocation decisions:

1. Tariff rates & longevity: Where will tariff rates ultimately wind up, and how long will they stay in place? This will be shaped by negotiations and the potential for retaliation at the individual country level.
2. Response from companies: Who will bear the cost of tariffs: companies or individuals? The answer will differ by product and may be a mix of both. But, for reference, any costs absorbed by companies will show up as lower profit margins or slower earnings growth, and costs passed to the consumer will show up as higher prices or inflationary pressures.

What could tariffs mean for your portfolio?

In what’s likely to remain an uncertain environment, it can be important to consider strategies that help diversify portfolio risk and position against downside market participation. The differences in how markets react to tariff policy may also create opportunities for active managers that are able to stay nimble and take advantage of dislocations.

Here are three key takeaways from recent market activity for advisors to keep in mind:

1. Diversify portfolio risk

Diversification has been working. Bonds and liquid alternatives have offset the sharp pullback we saw in U.S. equities.

Diversification has been working
Performance from 2/19/25-4/8/25

With bond market volatility on the rise, we see a lot of opportunity to diversify using liquid alternative strategies with low correlations to stocks and bonds. As an example, the BlackRock Global Equity Market Neutral Fund (BDMIX) was up 5% amid the S&P 500’s 19% slide between the recent market peak on February 19^th and bottom on April 8^th.³ The Bloomberg Aggregate Bond Index provided valuable ballast over that period as well but was only up 1%.⁴

2. Manage downside risk

There may be opportunities to manage risk within equities by gearing towards lower volatility strategies. By trading a lower upside capture for a lower downside capture, these strategies aim to outperform the broad market and held up well amid the early April recent tariff-induced volatility.

The iShares MSCI USA Min Vol Factor ETF (USMV) fell by less than half as much as the S&P 500 between the February 19-April 8 drawdown (-8.6% vs. -18.8%), and is up 1.6% YTD through April 9.⁵

There are a number of ways to manage downside risk, with varying impacts on upside and downside capture. Managing risk within equities allows you to potentially keep more of your upside potential, while shifting from stocks to bonds or alternatives may reduce downside capture more meaningfully – but also limit participation in any equity rallies.

A range of options have offered lower downside capture vs. the S&P 500
Upside and downside capture vs. the S&P 500

3. Staying nimble and taking advantage of tactical opportunities

Volatility can be a source of opportunity for active strategies that can take a nimble approach to security selection. Here are some examples of strategies that are using volatility to their advantage:

The BlackRock Global Equity Market Neutral Fund invests across ~7,000 global stocks, targeting returns that are uncorrelated to broad markets through a relatively even split of long and short positions. This allows the strategy to take advantage of higher dispersion in stock returns as individual company returns reflect varying degrees of sensitivity to policy and macro uncertainty. The strategy’s systematic approach leverages hundreds of data-driven insights, including measures of company exposure to tariffs through their manufacturing footprint, shipping data, and conference call transcripts.

Another alternative, the BlackRock Tactical Opportunities Fund, has the flexibility to take advantage of dispersion by going long and short in over 25 countries across stocks, bonds, and currencies. The team has historically been able to take advantage of dislocations between fundamentals and market pricing. For example, the team recently added to short positions on the U.S. dollar compared to other developed market currencies and extended short positions in long-dated U.S. Treasuries. The team estimates that recession risks seem overpriced and inflation risks appear underpriced.

BlackRock is here to help

Volatility cuts both ways and can create opportunity. By building in diversification and resiliency against volatile markets and standing ready to take advantage of opportunities (either via targeted iShares or active managers), you can equip yourself with the tools to navigate – and optimize – uncertainty.

Explore the Implementation Guide for ideas around navigating market volatility.

Ben Wallach and Faye Witherall contributed to this article.

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