Since Donald Trump won the US presidential election and the Republicans gained control of Congress, long-end government bond yields have increased, the dollar has strengthened, and equity markets have become more volatile. The challenge for investors now is to understand the implications of potential changes in US policy.
Tariffs are top of mind for many investors. This is the area where the president has the most unilateral authority to alter the market consensus around continued growth and receding inflation.
In this letter we detail our latest tariff scenarios, consider how they may affect our broader investment scenarios for the year ahead, and address the implications for investors.
In short, we believe investors should prepare for the Trump administration to pursue aggressive tariffs. On his first day in office, the president announced and signed a flurry of executive orders and other actions. The most tangible trade-related action came in the form of a memorandum directing federal agencies to investigate and address “unfair” trade and currency policies by other countries. China’s adherence to the 2020 trade deal and the US-Mexico-Canada Agreement (USMCA) were singled out.
The scope and severity of possible tariff outcomes remains uncertain. Our base case, to which we assign a 50% probability, is for the US effective tariff rate on China to rise to 30%, and for China to retaliate. We also expect efforts to limit transshipments, protect US technology interests, and impose tariffs on some EU exports.
We are also monitoring for a risk case, which could include 10-20% universal tariffs on all US goods imports, a larger tariff of around 60% on China, or sustained, broad, and large tariffs against Mexico and Canada. This scenario would have a more negative impact on markets and the economy.
These tariff scenarios are a key determinant in our broader investment scenarios. We believe the most likely outcome (50% probability) is for growth despite tariffs. US growth momentum is currently strong, we continue to believe the Federal Reserve will cut interest rates by 50bps in 2025, and we see a limited overall macroeconomic impact from an effective tariff rate of 30% on direct imports from China.
What does all this mean for investors from here?
We believe that the risk-reward for equities is attractive, although investors should prepare for near-term tariff-related volatility. We expect around 10% upside for US stocks over the balance of 2025 thanks to solid economic growth, AI tailwinds, and gradually falling yields.
We also view the outlook for high grade and investment grade bonds as positive. In our base case, we expect the 10-year Treasury yield to fall to 4.0% by the end of 2025 as growth and inflation gradually slow, and as the Fed cuts rates.
We expect EURUSD to rise to 1.06 by the end of 2025, but given likely near-term volatility we like to harvest volatility in major currency pairs, rather than taking strong directional views. We see upside to gold both in our base case and in our bear case risk scenarios.
The coming weeks are likely to see volatility in markets, so we reemphasize the importance of diversification. But while the path ahead may be uncertain, we continue to see opportunities for investors who are well prepared and adaptable.
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On his first day in office, President Trump reiterated his intention to take an aggressive stance on tariffs, and we believe that investors should prepare for this to be the case.
Figure 1: Tariffs are top of mind for investors
Number of mentions of tariffs in S&P 500 companies’ earnings transcripts
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Already, he has issued a memorandum directing federal agencies to investigate persistent trade deficits and address “unfair” trade and currency policies by other countries, reporting back by 1 April. The memo singled out China’s compliance with the 2020 trade deal and the USMCA. The president also told reporters that he was considering a 25% tariff on Mexico and Canada. On universal tariffs, he said “we may, but we’re not ready for that yet.”
In our base case, we expect the effective tariff rate on China to rise to 30% (from 11% currently). We also expect measures to protect technological interests, rules limiting transshipments, and tariffs on EU autos. Possible retaliation by China includes imposing tariffs, weakening the Chinese yuan, and restricting critical mineral exports.
At the same time, we do not believe that aggressive tariffs will necessarily lead to a major negative impact on the broader US economy. Up to a third of China’s exports to the US avoid tariffs by supply chain rerouting, and those that do not reroute currently account for just 12% of US imports by value, down from 18% in 2015. Non-tariff retaliations by China can still cause challenges in select areas, like critical minerals and agricultural supply chains, though currency actions and/or selling of Treasury bonds may not have as much of an impact as they once could have had. China’s official holdings of US Treasuries have fallen from USD 1.1tr to USD 768bn over the past three years and should be seen in the context of a total refinancing need of USD 10tr this year.
We do not believe that tariffs would necessarily lead to persistently higher inflation. Using market-based gauges, there is little sign that inflation expectations have become unanchored. The Fed is likely to look through one-off price increases because of tariffs. And the central bank's own analysis of 2018-19 suggests that it is the potential impact on growth that would concern them more than the inflation impact.
What could lead to a worse outcome for markets and the economy?
Potential tariff outcomes
We expect trade policy, including the use of tariffs, to play a central role in the Trump administration’s agenda. While the range of possible policy permutations is wide, we group the potential outcomes into the following four scenarios:
Overall, we see the following scenarios for the remainder of the year:
Scenario | Scenario | Bull case: strong growth | Bull case: strong growth | Base case: growth despite tariffs | Base case: growth despite tariffs | Bear case: tariff shock | Bear case: tariff shock | Bear case: hard landing | Bear case: hard landing | |
---|---|---|---|---|---|---|---|---|---|---|
Scenario | Probability | Probability | Bull case: strong growth | 25% | Base case: growth despite tariffs | 50% | Bear case: tariff shock | 15% | Bear case: hard landing | 10% |
Scenario | Market path | Market path | Bull case: strong growth | Bond returns flat, equities up Equity markets rally amid strong US growth, accelerating consumption, and optimism about the impact of AI on earnings. Bond yields trend slightly up. | Base case: growth despite tariffs | Bond returns slightly up, equities up Equities rise owing to a stable and positive outlook for GDP and earnings growth. Bond yields fall slightly over the course of the year. | Bear case: tariff shock | Bond returns down slightly, equities down Equities and bonds suffer a correction due to fears of economic stagnation, a rising US fiscal deficit, and a longer period of tighter monetary policy. | Bear case: hard landing | Bond returns up, equities sharply down Global equities post double-digit losses, credit spreads widen. Valuations in AI stocks drop substantially. Safe-haven assets, such as high-quality bonds, gold, the US dollar, the Swiss franc, and the Japanese yen, appreciate. |
Scenario | Economic growth | Economic growth | Bull case: strong growth | The US economy continues to surprise positively, aided by policy support from deregulation and lower taxes. China’s economy turns the corner as policy stimulus proves more effective than expected and a US trade deal is reached quickly. European growth is lifted by improving global demand. | Base case: growth despite tariffs | The US economy continues to grow at a stable pace of around 2.0% over the next 12 months. Other Western economies experience weaker but positive growth in line with market expectations. Policy stimulus in China helps to stabilize economic activity. | Bear case: tariff shock | The disruption to global trade leads to lower US domestic demand and much weaker global economic growth, though likely falling short of a US or global recession. | Bear case: hard landing | Global growth falls over the next 12 months owing to weakness in consumer spending and labor markets and/or a fall in AI-related investments. GDP contracts for one or more quarters in the US and the Eurozone. Policy stimulus in China fails to stabilize the economy. |
Scenario | Inflation | Inflation | Bull case: strong growth | Continues to fall in Europe but stabilizes above target in the US as fiscal stimulus lifts consumption. | Base case: growth despite tariffs | Resumes its weakening trend in the developed world. Further softening in US core PCE opens door for more Fed rate cuts by mid-2025. | Bear case: tariff shock | Remains elevated in the US as each subsequent round of tariffs puts additional upward pressure on prices. Inflation in targeted countries normalizes less quickly as currencies weaken to offset the tariff impact. | Bear case: hard landing | Falls as demand for goods and services collapses. |
Scenario | Central banks | Central banks | Bull case: strong growth | The Fed pauses as inflation normalization stalls. Other central banks cut rates in line with expectations as inflation continues to normalize despite stronger-than-expected economic activity. | Base case: growth despite tariffs | All major central banks ease policy by mid-2025 with the exception of the Bank of Japan. The Fed cuts rates by 50bps in 2025. The ECB cuts rates by 25bps every meeting until mid-2025. | Bear case: tariff shock | Central banks adopt a more cautious approach to monetary easing for fear of a longer period of above-target inflation and dis-anchoring inflation expectations. | Bear case: hard landing | Major central banks cut rates swiftly at first signs of an economic downturn, bringing monetary policy back into accommodative territory. The Fed lowers its policy rate by at least 200bps over the next 12 months. |
Scenario | US politics / Geopolitics | US politics / Geopolitics | Bull case: strong growth | US corporate tax cut to 20% or lower. A quick trade deal happens between the US and its main trading partners. | Base case: growth despite tariffs | President Trump extends the time frame of temporary tax relief policies in the US but stops short of lowering US corporate taxes. Selective tariffs are implemented on US imports, mainly targeting China, with some tariff retaliation by other countries. The chances of a cease fire deal in the Ukraine have increased. | Bear case: tariff shock | The Trump administration imposes large tariffs on imports from multiple countries, with proportionate retaliation by targeted trading partners. | Bear case: hard landing | The Trump administration imposes large tariffs on imports from multiple countries, with proportionate retaliation by targeted trading partners. |
Here are our key messages for investors looking to navigate this backdrop of diverse potential outcomes:
Key targets for December 2025 | Key targets for December 2025 | Spot* | Spot* | Bull case: strong growth | Bull case: strong growth | Base case: growth despite tariffs | Base case: growth despite tariffs | Bear case: tariff shock | Bear case: tariff shock | Bear case: hard landing | Bear case: hard landing |
---|---|---|---|---|---|---|---|---|---|---|---|
Key targets for December 2025 | MSCI AC World | Spot* | 1,061 | Bull case: strong growth | 1,240 (+17%) | Base case: growth despite tariffs | 1,140 (+7%) | Bear case: tariff shock | 890 (–16%) | Bear case: hard landing | 800 (–25%) |
Key targets for December 2025 | S&P 500 | Spot* | 6,086 | Bull case: strong growth | 7,000 (+15%) | Base case: growth despite tariffs | 6,600 (+8%) | Bear case: tariff shock | 5,100 (–16%) | Bear case: hard landing | 4,500 (–26%) |
Key targets for December 2025 | EuroStoxx 50 | Spot* | 5,206 | Bull case: strong growth | 5,900 (+13%) | Base case: growth despite tariffs | 4,900 (–6%) | Bear case: tariff shock | 4,000 (–23%) | Bear case: hard landing | 3,800 (–27%) |
Key targets for December 2025 | SMI | Spot* | 12,208 | Bull case: strong growth | 14,200 (+16%) | Base case: growth despite tariffs | 12,200 (–0%) | Bear case: tariff shock | 10,500 (–14%) | Bear case: hard landing | 10,200 (–16%) |
Key targets for December 2025 | MSCI EM | Spot* | 1,082 | Bull case: strong growth | 1,250 (+15%) | Base case: growth despite tariffs | 1,160 (+7%) | Bear case: tariff shock | 870 (–20%) | Bear case: hard landing | 850 (–21%) |
Key targets for December 2025 | Fed funds rate (upper bound) | Spot* | 4.50 | Bull case: strong growth | 4.50 | Base case: growth despite tariffs | 4.00 | Bear case: tariff shock | 4.00 | Bear case: hard landing | 1.00 |
Key targets for December 2025 | US 10y Treasury yield (%) | Spot* | 4.61 | Bull case: strong growth | 5.25 | Base case: growth despite tariffs | 4.00 | Bear case: tariff shock | 5.00 | Bear case: hard landing | 2.50 |
Key targets for December 2025 | US high yield spread** | Spot* | 259bps | Bull case: strong growth | 250bps | Base case: growth despite tariffs | 300bps | Bear case: tariff shock | 450bps | Bear case: hard landing | 700bps |
Key targets for December 2025 | Euro high yield spread** | Spot* | 301bps | Bull case: strong growth | 300bps | Base case: growth despite tariffs | 340bps | Bear case: tariff shock | 500bps | Bear case: hard landing | 700bps |
Key targets for December 2025 | US IG spread** | Spot* | 70bps | Bull case: strong growth | 55bps | Base case: growth despite tariffs | 70bps | Bear case: tariff shock | 120bps | Bear case: hard landing | 180bps |
Key targets for December 2025 | Euro IG spread** | Spot* | 96bps | Bull case: strong growth | 90bps | Base case: growth despite tariffs | 105bps | Bear case: tariff shock | 160bps | Bear case: hard landing | 200bps |
Key targets for December 2025 | EURUSD | Spot* | 1.04 | Bull case: strong growth | 1.10 (+6%) | Base case: growth despite tariffs | 1.06 (+2%) | Bear case: tariff shock | 0.98 (–6%) | Bear case: hard landing | 1.05 (+1%) |
Key targets for December 2025 | Commodities (CMCI Composite) | Spot* | 1,853 | Bull case: strong growth | 2,000 (+8%) | Base case: growth despite tariffs | 1,935 (+4%) | Bear case: tariff shock | 1,725 (–7%) | Bear case: hard landing | 1,600 (–14%) |
Key targets for December 2025 | Gold*** | Spot* | USD 2,771/oz | Bull case: strong growth | USD 2,550/oz (–8%) | Base case: growth despite tariffs | USD 2,850/oz (+3%) | Bear case: tariff shock | USD 3,050/oz (+10%) | Bear case: hard landing | USD 3,150/oz (+14%) |