BlackRock Bulletin

Tariffs signal global trade shift

­Market take

Weekly video_20250203

Wei Li Global Chief Investment Strategist, BlackRock Investment Institute

Opening frame: What’s driving markets? A special Market take

Camera frame

The U.S. has announced tariffs on imports from Canada, Mexico and China – ranging from 10% to 25%. It has also signaled more to come on imports from the European Union. We believe that this represents a sharp escalation in trade protectionism and if fully implemented, the effective rate of U.S. tariffs would go back [near] 1930s levels.

Title slide: Tariffs signal global trade shift

1: Broad economic fallout

We believe that the broader economic implications could be larger than the direct impact. Ripple effects could affect corporate and investor confidence, it could strain traditional alliances, it could lead to a reassessment of supply chains. And just like the U.S., Canada and Mexico are positioning tariffs as a matter of national security.

And if [these] proposed tariffs are prolonged, it could hurt growth, it could add to inflation. And the [Federal Reserve’s] ability to come to the rescue of the economy is constrained in the face of already sticky inflation.

2: Heightened uncertainty and volatility ahead

How this unfolds is extremely uncertain. We believe 10% tariffs could be the new baseline for the U.S. to earn tax revenue, but 25% tariffs could actually be the leverage [used] in negotiations – as seen in the decision to delay tariffs on Mexican and Canadian. Legal challenges could delay implementation and further add to market volatility.

3: Near-term pressure on U.S. stocks.

In the very near term, investors may well demand greater compensation for the risk of holding U.S. stocks in the face of tariff uncertainty. But ultimately risk asset pullbacks could actually affect the extent to which tariffs are implemented, as seen during the first term of President Trump.

Markets could also eventually adjust to a new regime of 10% tariffs if growth stays solid and inflation is contained.

Outro: Here’s our Market take

We believe resilient economic growth, solid corporate earnings, potential deregulation and the AI mega force [will] continue to support U.S. equities over the six- to 12-month horizon, which is why we remain overweight. We also continue to like mega cap tech because of their very strong balance sheets, as well as their central role in the AI buildout.

We think that the U.S. dollar could continue building on to its near-term strength, but actually we weakness beyond this year. We are underweight long duration U.S. Treasuries because we believe investors [will] demand more compensation for holding them in portfolios, but we actually become more positive on European government bonds – euro area government bonds – because we see more room for [the European Central Bank] to continue cutting rates. We also favor gold in this environment.

Closing frame: Read details: blackrock.com/bii

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BIIM0225U/M-4214028

The new U.S. tariffs mark a sharp escalation in trade protectionism that could have broader economic implications.

Prolonged tariffs as proposed risk hurting growth, with the Fed’s ability to respond constrained by already sticky inflation.

U.S. equities may come under near-term pressure. Yet solid earnings, potential deregulation and the AI theme support our positive tactical view.

U.S. tariffs set to be imposed on imports from Canada, China and Mexico – ranging from 10% to 25% – and suggestions of forthcoming tariffs on the European Union mark a sharp escalation in trade protectionism. This shows that tariffs will be a key policy tool for the new U.S. administration, as telegraphed during the presidential campaign. The effective rate of U.S. tariffs will be close to 1930s levels if fully implemented. We think 10% tariffs could be the new baseline for the U.S. to earn tax revenue, while 25% may prove to be used more as leverage in negotiations – as seen in the decision to delay tariffs on Mexico for a month. But uncertainty is high. What’s key for markets is how long 25% tariffs last: the longer they hold, the more permanent the supply chain shifts. Legal challenges could delay implementation and add to market volatility, in our view. How countries retaliate is also important – and could draw further U.S. escalation. These actions, and their ripple effects, could dent corporate and investor confidence.

The broader economic implications could be larger than the direct effects, in our view. Prolonged tariffs as proposed could hurt growth and add to inflation. We already thought loose fiscal policy and supply constraints – like an aging workforce – would keep inflation above the Federal Reserve’s 2% target. That leaves the Fed limited flexibility if growth slows. Another implication: a likely reassessment of supply chains. Like the U.S., Canada and Mexico are positioning tariffs as a matter of national security, urging consumption of non-U.S. goods and limiting reliance on cross-border trade.

In markets, we think U.S. equities could come under pressure in the next few months as investors seek additional compensation for these risks. Yet we think risk asset pullbacks could impact the ultimate extent of tariffs, as seen during the first administration of President Donald Trump. More broadly, resilient economic growth, solid corporate earnings, potential deregulation and the AI mega force keep us positive on a six- to 12-month tactical view. Markets could eventually adjust to a new regime of 10% tariffs if growth stays solid and inflation contained. Mega cap tech can keep doing well given strong balance sheets, earnings resilience and its central role in the AI buildout, in our view.

The U.S. dollar will likely build on its strength near term, but we see downside risks beyond 2025. These developments reinforce our tactical underweight on long-term U.S. Treasuries and expectation that investors will demand greater compensation for the risk of holding them. We turn more positive on euro area government bonds and think the European Central Bank has room to keep cutting rates. We also favor gold.

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