Tariff turmoil or trade truce?

Hi my name is Meera Pandit. I am Global market Strategist at J.P. Morgan Asset Management. Welcome to On the Minds of Investors. Today's topic "Tariff turmoil or trade truce?". The recent market sell-off has investors pondering when markets could stabilize, if we’re headed for recession, and if there could be a pro-growth policy pivot. While we cannot predict the future, we can consider possible downside and upside scenarios to markets and the economy.

Principally, there are four market outcomes: higher or lower equities in combination with higher or lower yields. In partnership with our Portfolio Insights team, we have designed the five scenarios below that investors can use to assess potential portfolio impacts through our Portfolio Analysis tool.

Tariff turmoil (stocks down, yields up) – A tit-for-tat trade war ensues, weighing on business and consumer confidence. Profits slow due to weaker revenue growth and margin compression due to elevated costs. Still, some costs are passed on to consumers, rekindling inflation. Stocks fall domestically and internationally, while yields and the dollar rise.

Trade truce (stocks up, yields down) – The U.S. negotiates trade agreements with key trading partners. With uncertainty lifted, buybacks, M&A, and capex jump. Stocks rally, particularly internationally as the dollar falls. The threat of higher inflation from tariffs abates, easing yields and allowing the Fed to complete its rate cutting cycle. 

Tax cut triumph (stocks up, yields up) – Congress passes an expansive tax bill, which boosts consumer spending, real GDP growth, and earnings. Small caps and domestically oriented large caps benefit. However, this adds trillions to the deficit, lifting bond yields. Despite tariff headlines, international stocks shrug off trade concerns, although are limited by a stronger dollar and weaker growth.

Tech tumble (stocks down, yields down) – Competitive advantages of U.S. AI tech leaders are threatened by new entrants and new innovations. Leading tech companies fail to translate massive capex spending into returns on investment. Profits disappoint and markets correct, but international and value stocks are more resilient. Yields fall as investors seek protection.

Inflation spike and Fed hike (stocks down, yields up) – Inflation reaccelerates and the Fed hikes rates. Stocks tumble while yields spike above 5%. Both consumers and margins absorb higher costs and financing becomes more expensive, hurting profitability, particularly for small caps.

Thus far, we’ve seen glimmers of nearly all of these scenarios this year, resulting in volatile markets and unexpected outcomes. Previously out-of-favor asset classes, like duration, value stocks, and international equities, have protected and outperformed – and may continue to do so. Alternative investments have provided additional options for diversification, income, and enhanced returns. While our next destination is unknown, the journey can be eased by proactive, sensible diversification.