Weekly market commentary

The trade conflict between the US and China is causing major economic disruptions. If tariffs stay at current levels, we expect a supply-driven contraction in US activity this year. Yet this is very different from a typical business cycle recession given Covid-like supply constraints. Hard economic rules binding on policy may limit the damage. The AI mega force keeps us overweight US stocks and positive on developed market stocks, even with more volatility likely.

Getting ahead of tariffs

Contribution to annualized US GDP growth, 2020-2025

US tariffs and uncertainty initially sparked concerns about waning confidence and declining demand. That’s now evolving into supply-driven disruptions, akin to the difficulties US companies faced getting inputs for goods during the Covid-19 shock. Case in point: Companies rushed to import goods during Q1 to get ahead of tariffs, leading to a record surge in imports. See the orange bar in the chart. Along with a surge in inventories, we expect more volatility in activity data that don’t yet reflect the ensuing disruptions since the April 2 tariff announcement, especially the maximal US stance on China. If current steep tariffs stay in place between the US and China, we see a supply-driven economic contraction tied to trade-related disruptions like the Covid-19 shock. This contraction is not a typical business cycle recession – and one we can look through on a tactical horizon.

We expect a contraction marked by production shutdowns, bottlenecks and shortages like during the pandemic – though spending on services won’t be as directly affected. Activity may also restart quickly as it did during the pandemic. These supply-driven elements could bolster the inflationary pressure from tariffs, building on already high inflation. That presents the Fed with a sharper trade-off between protecting growth by coming to the rescue with rate cuts and reining in inflation. We track a range of indicators – like port traffic, capital spending plans and high-frequency financial and consumer spending data – to monitor how the supply-driven shock ripples out. This reinforces the hard economic rule that supply chain dependencies can’t be rewired quickly without disruption. If these rules constrain negotiations, damage could be limited.

A sectoral story

Some sectors are more exposed to tariffs than others – with sectoral differences already at play in Q1 earnings reports. The companies at the forefront of the AI mega force have largely kept driving US equity strength, while policy uncertainty weighs more heavily on the rest of the market. Some big tech companies have beat Q1 earnings expectations, noted surging AI-driven demand and announced plans to increase AI-related investment. That underscores how the AI mega force persists, even with major supply-driven disruptions – keeping us positive on developed market (DM) stocks, especially the US On the flip side, automakers are among the most exposed to key supply inputs from China, with some flagging the impact of tariffs in their full-year earnings guidance. The longer policy uncertainty lasts, the deeper the damage could be.

We have evolved our views as markets have adjusted to uncertainty. Just two days after April 2, we reduced risk by cutting our tactical horizon to three months. Yet the 90-day tariff pause showed economic rules can spur changes in policy. That led us to return our tactical horizon to six to 12 months to dial up exposure to developed market stocks. On a longer-term horizon, key questions remain about the best way to tap into an economic transformation, if investor bias for domestic assets will prevail, the outlook for the US dollar’s haven status, and investing in private markets amid structurally higher interest rates.

Our bottom line

We expect tariffs at current levels to spur a supply-driven contraction this year, while supply disruptions boost inflation. The AI theme keeps us positive on DM stocks, especially the US, though more volatility is likely ahead.

Market backdrop

The above-consensus US payrolls data helped boost risk assets and offset a drop in some tech shares on concerns about the tariff impact. The S&P 500 climbed 3% last week, closing the gap with where it was before April but still down 8% from the February all-time highs. US 10-year Treasury yields ended the week at 4.31%, up about 40 basis points from their April lows. Markets have priced out some Federal Reserve rate cuts and now see a first quarter-point cut coming as soon as July.

The Federal Reserve takes center stage this week. Last week’s US Q1 GDP report showed major disruptions to activity even before the April 2 tariff announcement, sharpening the tradeoff the Fed faces between lower growth and higher inflation. Even with the contraction of activity we expect, we don’t see the Fed cutting rates as much as the market is pricing in. US and China trade data for March will reflect some of the frontloading of US imports before the tariffs.

Read our past weekly commentaries here.

Big calls

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

Tactical granular views

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

Euro-denominated tactical granular views

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

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