The one-two punch: tariff turbulence and economic uncertainty

The U.S. economy is at an inflection point as President Trump’s latest round of tariffs on Canada, Mexico, and China stokes concerns over inflation and slowing growth. While U.S. exceptionalism has underpinned global markets for over a decade, recent developments raise questions about whether cracks are forming in the foundation. What does this mean for portfolios? 

Markets, already uneasy, have reacted sharply to the escalating trade tensions, with equities selling off and economic indicators signaling a potential slowdown. The tariffs imposed on March 4th—25% on Canadian and Mexican imports and an additional 10% levy on Chinese goods—have sparked fears of higher costs for business and consumers alike. A potential “stagflationary shock” is emerging, driven by the combination of restrictive trade policies and tightening labor conditions. 

Core PCE inflation, a key measure watched by the Federal Reserve, has risen to 2.6%, while economic data suggests a cooling in consumer spending. January saw a 0.5% decline in real personal consumption, alongside a 0.9% drop in retail sales—signals that the post-pandemic spending boom may be losing steam. 

At the same time, a sharp rise in the U.S. trade deficit, which surged over 25% in January, has exacerbated fears of slowing domestic production. Stockpiling ahead of tariff implementation likely contributed to the widening gap, but the broader concern is whether businesses will pull back on investment amid uncertainty. 

The Atlanta Fed’s GDPNow tracker, a real-time estimate of economic growth, has plunged deep into negative territory, forecasting a 2.8% contraction for Q1. 

The S&P 500, which had been hovering near all-time highs, has shed 6% over the past two weeks as investor sentiment deteriorates. Bank stocks, particularly sensitive to economic uncertainty, have borne the brunt of the sell-off, with the KBW Bank Index down over 4% on Tuesday. Meanwhile, bond markets are pricing in more aggressive rate cuts from the Federal Reserve. Futures markets now anticipate 75 basis points of easing by year end, up from a single expected cut just a few months ago. 

The U.S. dollar, which typically strengthens in times of uncertainty, has instead weakened in recent weeks, reflecting concerns that trade tensions will weigh on growth more than initially expected. This could open the door for European and emerging market equities to outperform, especially as U.S. assets no longer appear to be the default safe-haven play. 

The first official Q1 GDP estimate, set for release on April 30, will provide further clarity on the extent of the economic slowdown. While some analysts expect resilience in the labor market and corporate earnings, the broader picture remains uncertain. If tariffs remain in place and inflation persists, the Fed may find itself in a difficult position—caught between the need to support growth and the risk of letting inflation run hot. 

For investors, diversification remains key. While U.S. large cap stocks have led the way for over a decade, the shifting macro landscape suggests opportunities in international markets and alternative asset classes. As global trade dynamics continue to evolve, flexibility and adaptability will be crucial in navigating the road ahead. 

Arjun Kaushik contributed to this article. S&P and other market data from Bloomberg.