On April 2 ("Liberation Day"), President Trump announced a sweeping set of tariffs aimed at reducing trade imbalances, encouraging domestic manufacturing, and strengthening economic security. These measures include:

• A 25% tariff on foreign-made automobiles, effective immediately.
• A baseline 10% tariff on all imports, beginning April 5th.
• Reciprocal tariffs at half of the Office of the U.S. Trade Representative’s calculation* of a country’s tariff and non-tariff barriers to U.S. trade, effective April 9th.

While the stated objectives center on U.S. economic strength (reduce trade imbalances, encourage domestic manufacturing, strengthen economic security, etc.), the market reaction and broader economic implications are more nuanced. Below, we outline our perspective on what these policy shifts mean for the economy, the market, and your portfolio.

‍

Economic and Market Impacts

1. Trade Uncertainty Will Persist

While we now have more clarity, the scale of these tariffs exceeds most expectations, and their impact aligns with worst-case scenarios. Tariff rates will exceed 10% for 58 countries, including the EU, with China facing an additional 34% tariff, pushing some rates to 54%, near the 60% target President Trump has previously mentioned.

2. Inflation Uncertainty Will Increase

Initial estimates suggest these tariffs could add approximately 2.5% to core inflation to an already elevated number by historical standards. Unlike the short-term effects of prior tariff cycles, today’s inflationary pressures are structurally higher, and consumer expectations have already risen, so we do not believe tariffs represent a one-off increase in prices. We anticipate both market-based and consumer inflation expectations to increase, particularly in the near and medium term.

3. Growth Projections Are Declining

• Q2 GDP growth estimates, previously near 2.0%, now have worst-case revisions of 1.0%.
• 2025 full-year GDP growth projections have dropped from 2.5% to 0.5%.

While our internal probability of a recession in the next 12 months has risen, with additional risk if tariffs persist or escalate, a recession is still not our base case. Investors should be aware that the market may remain volatile, though, as tariffs remain a prevalent topic for businesses and the market. Market multiples (i.e., price-to-earnings ratios for the S&P 500 index) may continue to re-rate lower in the short term in this market environment.

4. Fed Policy Uncertainty Remains High

The Federal Reserve is unlikely to pivot toward rate cuts in the near term, as inflation concerns take precedence over slowing growth. For the Fed to act, they would need clear signs of tightening financial conditions that do not further elevate inflation expectations.

5. Market Volatility Will Increase

Equity and fixed-income markets will likely experience heightened volatility.

• Short-term interest rates will react more to slowing growth than inflation, as these are new developments.
• Long-term rates will experience two-way volatility as inflation, growth, and broader risk factors are priced in.
• Earnings uncertainty will rise, with corporate guidance likely to deteriorate, particularly in small-cap stocks and lower-credit-quality issuers.

‍

Investment Strategy in a Changing Landscape

While these policy shifts will cause volatility, long-term investment opportunities remain intact. Our strategy remains focused on quality, income generation, inflation resilience and diversification.

1. Focus on High-Quality Assets

• Equities: Large-cap companies with strong earnings quality are best positioned. Small caps and cyclicals will likely face the most pressure.
• Fixed Income: We favor high-quality issuers and remain cautious on leveraged loans.

2. Income Generation

• Dividend-yielding equities and credit diversification remain attractive.
• Despite expectations for wider spreads, high-yield corporate credit looks strong on a relative quality, duration, and yield basis.

3. Strategic Sector Positioning

Sector exposure aligns with structural investment trends:

• Infrastructure equities and bonds benefit from both near-term inflation protection and long-term growth in digital infrastructure.
• Defense has strong investment tailwinds, particularly in the U.S. and Europe.

‍

What Could Change the Policy Path?

While markets are initially pricing in the worst-case scenario, potential relief could come from:

• Countries with the highest tariffs quickly negotiating downward adjustments.
• Softening rhetoric from key Trump administration officials.
• A potential Fed response (though unlikely in the immediate term).
• As has happened before, the Trump administration responds to market and/or political pressure and reverses or lowers the tariffs.

‍

Final Thoughts

Trade uncertainty is not new, and while this policy shift is meaningful, investors should avoid reactionary decisions. While there are still a lot of unknowns a long-term strategy remains paramount, and we will continue to monitor developments closely. We will provide further updates as new information emerges. As always, we encourage you to reach out with any questions.

‍

* This calculation has been widely identified (and criticized) as (US exports to the country - US imports from the country) / (US imports from the country), rather than actual foreign tariff rates.

‍

Unless otherwise indicated, commentary on this site reflects the personal opinions, viewpoints and analyses of the author and should not be regarded as a description of services provided by GatePass Capital or its affiliates. The opinions expressed here are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual on any security or advisory service. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice. While all information presented, including from independent sources, is believed to be accurate, we make no representation or warranty as to accuracy or completeness. We reserve the right to change any part of these materials without notice and assume no obligation to provide updates. Nothing on this site constitutes investment advice, performance data or a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Investing involves the risk of loss of some or all of an investment. Past performance is no guarantee of future results.

‍

‍