Tariff Tensions

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.”

Disclosure

The views expressed represent the opinion of Ferguson Wellman. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Statements of future expectations, estimates, projections and other forward-looking statements are based on available information and Ferguson Wellman’s views as of the time of these statements. Past performance may not be indicative of future results. Ferguson Wellman, Octavia Group and West Bearing do not provide tax, legal, insurance or medical advice. This material has been prepared for general educational purposes only and not as a substitute for qualified counsel who can determine how this information applies to you. We believe the information provided is from reliable sources but should not be assumed accurate or complete.

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