Tariffs Are Still the Biggest Uncertainty

Markets have largely absorbed the initial impact of tariffs, with companies reporting better-than-expected Q1 earnings due to successful mitigation efforts like supply chain adjustments. While a recent fund manager survey indicates a reduced tail risk of a trade war-induced global recession (down to 47% from 80% in April), the US effective tariff rate remains at a multi-decade high. Trade negotiations, encompassing complex issues beyond tariffs, are expected to be protracted, likely extending into Q4 or longer, signaling continued uncertainty for global trade structures despite corporate adaptability.

Analysis

The market has transitioned from the initial shock of tariff implementations to a phase of cautious adaptation, with corporate performance proving resilient. First-quarter 2025 earnings surpassed expectations, largely due to successful mitigation efforts including supply chain reconfigurations, pricing adjustments, and operational efficiencies. This corporate adaptability is reflected in investor sentiment, as a recent fund manager survey indicates the perceived tail risk of a trade war triggering a global recession has fallen to 47% from a high of 80% in April. Despite this, the U.S. effective tariff rate is at its highest level since 1937, highlighting the significant underlying economic friction. Negotiations are proving protracted and complex, extending beyond simple tariffs to encompass critical issues like AI technology export controls and access to rare earths. With little progress seen at the G7 meeting and a general expectation that a resolution will take until at least the fourth quarter, the environment remains one of prolonged uncertainty where deadlines like July 9th function more as pressure tactics than firm endpoints.

Key Decisions for Investors

• Focus on companies demonstrating strong operational agility, particularly those with flexible supply chains and pricing power that have already proven their ability to mitigate tariff impacts.
• While immediate recession fears have eased, the trade conflict remains the top tail risk; therefore, maintain portfolio hedges against geopolitical escalations, especially around key negotiation deadlines.
• Given that a comprehensive trade resolution is not anticipated until Q4 or later, investors should expect continued headline-driven volatility and avoid positioning for a near-term breakthrough.
• Monitor developments in strategic sectors like AI and rare earths, as these non-tariff issues are central to negotiations and may trigger targeted volatility or present unique investment opportunities.