Investors' Outlook: Tariff tango

Tariff tango

February opened with markets stepping into an orchestrated dance of quarterly earnings and economic policy moves that drove market sentiment in tandem.

Big Tech earnings exposed dispersion within the sector, as some tech giants like Meta and Microsoft reported better-than-expected results, while others, like Tesla stumbled. And old-economy stocks¹ showed steadier footing, drawing attention to potential sectoral shifts. Interestingly, after two years of tech dominance, the Dow Jones Industrial Average has outpaced the Nasdaq Composite so far this year – an early sign that investors may be pivoting toward traditional industries and value-oriented stocks, likely amid concerns over lofty tech valuations.

President Donald Trump also disrupted the beat with a wave of tariff announcements. A blanket 25 percent tariff on Canadian and Mexican imports is now in effect, prompting retaliatory tariffs from both countries. Additionally, Trump has raised the levy on Chinese goods from 10 percent to 20 percent, and China has responded with its own retaliatory measures. Trump also outlined a 25 percent tariff on steel and aluminum imports, due to begin in mid-March, and floated reciprocal tariffs against countries with levies on US imports to start in April.

We’re keeping a close eye on US consumers, who seem worried about tariffs’ impact on inflation, which is also why markets are rattled. Consumer sentiment has already taken a hit, and that’s worth noting because that’s what’s helped keep the US economy afloat. If long-term inflation expectations become dislodged, it’s likely going to impact monetary policy. We believe these measures could pose short-term inflation risks but are more likely to slow economic growth, though that would weigh on demand and ultimately curb inflation. Rather than a permanent policy, tariffs still appear to be a negotiating tool for advancing “America First” policies. We don’t expect them to last all year or remain at current levels. We believe these measures pose short-term inflation risks but are more likely to slow economic growth, though that would weigh on demand and ultimately curb inflation. Rather than a permanent policy, tariffs still appear to be a negotiating tool for advancing “America First” policies. We don’t expect them to last all year or remain at current levels.

Investors are also closely monitoring prospects for a Russia-Ukraine ceasefire. A resolution could allow Trump to push Europe to increase their military spending while shifting US fiscal spending. And for Europe, it could be a catalyst for more fiscal stimulus and reduced policy uncertainty could improve economic sentiment.

The macroeconomic divergence between the US and Europe remains stark, which may drive different central bank responses. Recent inflation and macroeconomic data in Europe are likely to pave the way for further rate cuts by the European Central Bank (ECB), while the US Federal Reserve’s path to its 2 percent target looks more challenging. In China, the National People’s Congress committed to a growth target of about 5 percent. 

In this Investors’ Outlook, we examine Trump's “Trade War 2.0” – his motives and the potential impact on economic growth, inflation, and monetary policy – while exploring possible scenarios ahead. You’ll also find our take on commodities and the details of our asset allocation.

The dance floor is crowded, but we aim to make every step count.

1. Stocks from traditional industries like manufacturing, energy, transportation, or consumer goods that can provide stable earnings, dividends, and long-term value.