Accelerating the transformation

An accelerated transformation

We have long argued that the global economy is undergoing a profound structural transformation driven by mega forces, such as geopolitical fragmentation. Abrupt changes to U.S. trade policy are accelerating the transformation already underway. Sweeping U.S. tariffs, if fully implemented, would push the effective tariff rate to the highest level since at least the 1930s – see the chart below – with the steepest tariffs targeted at imports from China.

U.S. effective tariff rate, 1900-2025

Binding economic rules

These U.S. policy shifts are now bumping up against economic rules that put bounds on the realms of what’s possible, notably tied to U.S. debt financing and supply chains. We track those rules, not each policy twist.

One such rule: Global supply chains can’t rewire quickly without major disruption. Recent U.S. trade updates show how this rule is starting to bind as negotiations take shape. China is a key supplier of critical minerals, semiconductors, industrial parts and auto parts, U.S. Census data show. That means tariffs could up costs, cut access to key inputs and halt production.

These economic rules are we see U.S. policy settling down on our tactical six- to 12-month horizon even as we expect more near-term volatility. We stay positive on developed market (DM) stocks.

Big investment questions

This unusual backdrop challenges traditional investing and raises big questions about the trajectory for global markets. How will the role of U.S. Treasuries in portfolios evolve? It’s one of the big questions arising from the recent collision of two mega forces: geopolitical fragmentation and the future of finance.

Long-term U.S. government bonds – a traditional cushion to falling stocks – have not recently provided portfolio ballast. And the U.S. dollar slid against major currencies during the U.S. risk asset selloff in April. That’s unusual compared with previous episodes. Investors are reassessing the haven status of the U.S. dollar, in our view.

Meanwhile, gold has surged to record highs as investors seek alternatives. See the chart below. We think gold will play a bigger role as a portfolio diversifier.

Asset performance during S&P 500 selloffs

Other big questions: How to invest with a shifting market makeup? What’s the best way to harness an economic transformation? Will investors stick to domestic markets? Does locking up capital for longer work today?

Today’s highly concentrated stock market may reflect the AI mega force at play. Yet concentration can be a risk too. We think that reinforces why investors should be even more deliberate with risk-taking. Capturing market shifts during periods of transformation could deliver greater potential returns. We believe today’s transformation lends itself to more granular investing, particularly across sectors. The mega forces fueling the transformation boost demand for private capital, in our view. Yet interest rates settling above pre-pandemic levels may potentially challenge future returns from private markets.

Learn more about our big calls for 2025. Explore the Asset class views tab above.

Macro policy is now more disruptive and less of a stabilizer

Since late 2024, we saw macro policy becoming a potential source of disruption – and we think that’s come to pass. Jarring U.S. economic policy shifts – particularly in trade – has brought unprecedented uncertainty.

U.S. trade policy uncertainty index, 1985-2025

U.S. economic policy uncertainty index, 1985-2025

Sustained uncertainty can create permanent damage

Britain’s exit from the European Union serves as a recent example of how sustained uncertainty can create permanent damage to an economy. Elevated uncertainty dented UK investment relative to the U.S. and the euro area.

Capital investment, 2015-2024