by Joe Herrle, CFA
Vice President Alternative Assets

After last November’s election, it was widely expected that tariffs would become a significant focus in 2025. Initially, markets downplayed these concerns, viewing them primarily as negotiating tools rather than serious economic threats. Sentiment, however, has shifted dramatically in recent months, with tariff concerns evolving from a minor issue to a genuine growth concern heavily impacting market performance. Consequently, the S&P 500 has relinquished its post-election gains and now trades below pre-election levels.

Much of the uncertainty stems from the lack of clarity surrounding tariff policies, their objectives and potential responses from trading partners. This ambiguity has amplified concerns about the economic and earnings impacts, that are contributing to the current “growth scare.” To provide some perspective here are some key points:

Proposed tariffs include rates of 25% on
most imports from Canada and Mexico, 20% on imports from China and 25% on all steel and aluminum imports
Canada, Mexico and China collectively account for over 40% of all imported goods into the U.S.
Imported goods represent only 11% of total domestic consumer spending

It’s essential to note that while tariffs put upward pressure on prices and downward pressure on demand, their overall impact may not be as severe as many fear. While the tariff landscape is highly fluid and changing almost daily, as of this writing, (continued) even the most aggressive tariff proposals announced so far would likely result in less than a 1% one-time increase in price levels and an even smaller impact on GDP growth.

In other words, we don’t see the U.S. economy experiencing an ongoing rise in inflation or a sustained decline in economic output. If fully implemented, the effects of tariffs should peak within about one year, after which inflation and growth would likely return to trend levels over the following 12 months. So far, the greatest cost of tariffs is market volatility driven by uncertainty. Specifically, ambiguity about which products could be targeted, when tariffs will take effect and under what conditions they might
be removed.

This uncertainty creates challenges for both investors and businesses. Investors are particularly concerned about four potential impacts:

Companies may delay investment decisions due to the uncertain environment
Tariffs could lead to higher inflation, reducing corporate earnings and dampening consumer demand
Counter-tariffs from trade partners could erode demand for U.S. goods overseas
The Federal Reserve might be unable to cut interest rates if inflation rises due to tariffs, even if economic growth slows

Without clear guidance on tariff policies, businesses may struggle to realize their economic potential fully. Until greater clarity emerges, this uncertainty will act as an unexpected headwind for capital markets activity.

However, it’s important to remember that much of the current “growth scare” and recession speculation is based more on fear than concrete evidence.

Quantifiable signs of an impending recession remain limited. Historically, recessions typically involve several clear indicators:

Rapidly accelerating job losses leading to reduced consumer spending
Declining business investment
Significant downward revisions to profit growth estimates
Tightening financial conditions

Currently, none of these conditions have materialized. In fact, several concrete indicators suggest that the economy and market remain fundamentally solid:

The unemployment rate remains very low at 4.1%
S&P 500 earnings are still projected to grow around 10% this year (historically, earnings
growth averages only around 2% immediately before recessions)
Credit spreads—the difference in yield between corporate bonds and Treasury bonds—remain very low. Typically, these spreads widen significantly ahead of recessions

Given these facts, we appear far from recession territory. Despite recent volatility, current
data suggests we’re experiencing a typical bull market pullback rather than entering a bear market decline.

Remember that bull markets often “climb a wall of worry,” encountering bumps along their upward path. The best course of action during periods like this is patience and discipline. Staying invested over time greatly increases your odds of positive returns.

As Warren Buffett famously said, “The stock market is a device to transfer money from the impatient to
the patient.”

Disclosures