We get asked about tariffs all the time. Here's what we say

The U.S. has enacted its highest tariffs since 1933, averaging 18.6%, which is expected to result in higher consumer prices, with households potentially facing an average annual cost of $2,400, and a rise in inflation, albeit below 2022 peaks. While companies initially absorbed these costs, they are anticipated to pass them on, leading to slower hiring and a general economic slowdown. Despite these anticipated impacts, stock markets, including the S&P 500 and Nasdaq, have reached record highs, signaling investor confidence in the economy's resilience against these tariff pressures, with a recession not widely expected.

Analysis

The U.S. has entered a new trade environment with its highest average tariff rate since 1933, now standing at 18.6%. This policy is creating significant headwinds for the economy, with direct implications for corporate profitability and consumer costs. Companies like General Motors are already reporting substantial financial impacts, having absorbed $1.1 billion in tariff-related costs in a single quarter, a practice that is unsustainable and signals impending price hikes for consumers. Projections from Yale's Budget Lab estimate the average annual cost to households could reach $2,400. Concurrently, macroeconomic indicators are softening; while inflation at 2.7% remains below 2022's peak, it is expected to rise, and the labor market is showing signs of weakness with July job additions slowing to just 73,000. Despite this cautious fundamental outlook, U.S. equity markets are exhibiting notable resilience, with the S&P 500 and Nasdaq recently hitting record highs. This divergence suggests that investors currently believe the economy can withstand these pressures without entering a recession, a sentiment echoed by most economic forecasters.

Key Decisions for Investors

• Scrutinize portfolios for companies with significant international supply chain exposure, such as auto manufacturers and retailers, as they face immediate margin pressure and potential earnings revisions due to rising tariff costs.
• Monitor upcoming inflation and labor market data closely, as any significant deterioration beyond current expectations could challenge the market's optimistic 'soft landing' narrative and trigger a repricing of risk assets.
• Given the clear divergence between weakening economic fundamentals and record-high equity indices, investors should evaluate whether the market's current valuation fully accounts for the risk of slowing consumer spending and corporate profit erosion in the coming quarters.