Since our last update in the Trade Turbulence series, new trade deals and new tariff rates have been announced. While we are likely past peak tariff uncertainty, current tariff rates still stand at historically high levels, and plenty of uncertainties lie ahead. A recession is not in our base case, but stagflation risks remain high.

Where are we now, since our last publication?

• Some trade deals have been reached: European Union, Japan and South Korea now face 15% tariffs while Vietnam, Indonesia and Philippines face 19-20%. In return, these countries agreed to lower tariffs on U.S. goods and increase investments into the U.S. Markets where U.S. has a trade deficit with will likely face a tariff floor of 15%, while those U.S. has a trade surplus with, such as UK, could face tariffs of only 10%.
• Those who haven’t reached a deal face new tariffs: On August 1, U.S. President Donald Trump announced “new” reciprocal tariffs, near Liberation Day levels. Notably, Canada will face 35% (for non-USMCA goods), Switzerland 39% and Taiwan 20%. These tariffs will take effect on Aug 7. Tariffs on India increased from 25% to 50% on Aug 6 due to its purchases of Russian arms and oil, effective in 21 days.
• Other tariffs: Tariffs on Brazil increased from 10% to 50% due to political tensions, effective immediately. 50% tariffs on copper were also announced, but only on semi-manufactured products and their derivatives, which came as a relief to investors who expected broader copper tariffs.

All these will bring U.S. effective tariff rate to 17.8% on August 7, which is significantly higher than 2.4% in 2024. If more sectoral tariffs are implemented, tariff rate could approach Liberation Day levels of above 20%. But we are not as worried about recession risks as in April, due to current progress with negotiations, limited trading partner retaliation and significant easing of tensions between the U.S. and China.

Plenty of uncertainties lie ahead

• Sectoral tariffs of 100% on semiconductors and 250% on  pharmaceutical imports were suggested and could be confirmed soon.
• Transshipped goods through ASEAN countries could face higher tariffs, as was the case for Vietnam.
• Preliminary deal between the U.S. and China is set to expire on August 12. The end of the truce could see high tariff rates and various export restrictions returning. The two countries are currently in talks to extend the trade truce for 90 days.
• Negotiations to reduce tariffs are still in progress with markets facing new reciprocal tariffs. Deals that have been reached so far are frameworks only, so additional details could still surprise markets.
• Court of Appeals is set to announce the ruling on Court of International Trade’s decision that tariffs under International Emergency Economic Powers Act (e.g. reciprocal tariffs, tariffs on fentanyl crisis) exceeded the President’s authority. If the Court of Appeals and Supreme Court eventually uphold the same decision, President Trump still has other legal avenues to implement tariffs (e.g. Section 301, 232, 122) although they are more cumbersome or require investigation time. Tariff rates could drop significantly for a while, but prolonged uncertainty could still drag on economic activity.

Impact channels from tariffs?

• Sentiment: Following Liberation Day, markets were concerned over the strong pullback in sentiment levels across both consumers and corporates. Uncertainties about policy and economic environment would typically prompt a slide in consumer sentiment and a pullback in capital expenditure, which has been a key contributor towards pushing the U.S. economy into recessions in previously. Despite the negative news headlines around tariffs in recent months, however, sentiment levels have rebounded from the April-lows, albeit still below pre-Liberation Day levels (Exhibit 2). This affirms that peak uncertainty is likely behind us although more clarity around tariffs is needed for a rebound in sentiment, suggesting that consumer spending and corporate capital expenditure could be delayed in the near term, weighing on the growth outlook.
• Inflation: In our view, the inflation impact of higher tariffs has yet to unfold. Even as the tariff rate on U.S. imported goods has risen significantly, the price impact on consumers has been limited which in part could reflect the time lag for the newly imported goods to hit the store shelves and the absorption of costs by foreign producers and U.S. companies. While headline consumer price index (CPI) continues to run below expectations given the tariff risks, beneath the hood, the components of the index with a large share of imported durable goods have seen upticks attributable to tariffs. However, we expect the impact of the tariffs to flow through to core goods inflation more discernibly over the next few months, once the tariff increases kick in this month. The Federal Open Market Committee expects that the consumer inflation rate could exceed 3% in 4Q25.

Has the growth outlook of 2H25 changed?

Coming into 2H25, we had noted that the U.S. growth path will depend on the interaction of several policies such as tariffs, immigration, fiscal and monetary policy outlook. The policy direction thus far reaffirms our view of a downshift in growth in 2H25, with the U.S. economy to narrowly escape a recession. Following a strong 2Q25 GDP print in the U.S., the latest downgrades in prior months’ nonfarm payroll employment have thrown a spanner in the works, raising concerns over a sharp deceleration in economic activity. While the revisions were larger than normal, monitoring other labor market indicators will be key moving forward.

While our view remains for one monetary policy rate cut by the Federal Reserve in 4Q25, absent a rebound in economic activity akin to last year’s mid-summer upturn, there is increased likelihood that Federal Reserve will this quarter. While the macro environment could look soft in 2H25, we could see some relief in 1H26 as the temporary tax cuts in the One Big Beautiful Bill Act should lead to a bumper crop of income tax refunds early next year.

Investment implications

The overarching theme for markets is the transition from acute to chronic policy issues. While policy is no longer the sole focus, it remains a significant factor beneath the surface. The S&P 500 has reached all-time highs, and credit spreads are at their lowest levels. The first half of the year demonstrated the power of diversification with bonds providing stability during equity market volatility and international equity outperformance vis-à-vis the U.S.

More broadly, long-term investors should remain mindful of the structural factors such as automation and artificial intelligence (AI), as related revenue growth around these trends continue to justify the pipeline of capital expenditure. For investors, it suggests that they should no longer look towards strong U.S. economic tide momentum or lower interest rates but rather consider diversifying into alternative and international assets that have structural drivers. Focus should be on quality and large caps, particularly in financials and AI-related sectors. The digital technology theme requires significant real-world infrastructure build-out, offering opportunities in global equities.

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