As markets continue reacting to the Trump administration’s
tariffs, Michael Zezas, our Global Head of Fixed Income Research
and Public Policy Strategy, lists the expected impacts for
investors across equity sectors and asset classes.
Read more insights from Morgan Stanley.
---- Transcript -----
Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan
Stanley’s Global Head of Fixed Income Research and Public Policy
Strategy. Today we’ll be talking about the market impacts of the
recently announced tariff increases.
It’s Friday, April 4th, at 1pm in New York.
This week, as planned, President Trump unveiled tariff increases.
These reciprocal tariffs were hiked with the stated goal of
reducing the U.S.’s goods trade deficit with other countries.
We’ve long anticipated that higher tariffs on a broad range of
imports would be a fixture of U.S. policy in a second Trump term.
And that whatever you thought of the goals tariffs were driving
towards, their enactment would come at an economic cost along the
way. That cost is what helped drive our team’s preference for
fixed income over more economically-sensitive equities.
But this week’s announcement underscored that we actually
underestimated the speed and severity of implementation.
Following this week’s reciprocal tariff announcement, tariffs on
imports from China are approaching 60 per cent, a level we didn’t
anticipate would be reached until 2026. And while we expected a
number of product-specific tariffs would be levied, we did not
anticipate the broad-based import tariffs announced this week.
All totaled, the U.S. effective tariff rate is now around 22 per
cent, having started the year at 3 per cent.
So what’s next? Our colleagues across Morgan Stanley Research
have detailed their expected impacts across equity sectors and
asset classes and here are some key takeaways to keep in
mind.
First, we do think there’s a possibility that negotiation will
lower some of these tariffs, particularly for traditional U.S.
allies like Japan and Europe, giving some relief to markets and
the economic outlook.
However, successful negotiation may not arrive quickly, as it's
not yet clear what the U.S. would deem sufficient concessions
from its trading partners. Lower tariff levels and higher asset
purchases might be part of the mix, but we’re still in discovery
mode on this. And even if tariff reductions succeed, it's still
likely that tariff levels would be meaningfully higher than
previously anticipated.
So for investors, we think that means there’s more room to go for
markets to price in a weaker U.S. growth outlook. In U.S.
equities, for example, our strategists argue that first-order
impacts of higher tariffs may be mostly priced at this point, but
second-order effects – such as knock-on effects of further hits
to consumer and corporate confidence – could push the
S&P 500 below the 5000 level.
In credit markets, weakness has been, and may continue to be,
more acute in key sectors where tariff costs are substantial; and
may not be able to pass on to price, such as the consumer retail
sector. These are companies whose costs are driven by overseas
imports.
So what happens from here? Are there positive catalysts to watch
for?
It's going to depend on market valuations. If we get to a point
where a recession is more clearly in the price, then U.S. policy
catalysts might help the stock market. That could include
negotiations that result in smaller tariff increases than those
just announced or a fiscal policy response, such as bigger than
anticipated tax cuts.
Thanks for listening. If you enjoy the show, please leave us a
review wherever you listen and share Thoughts on the Market with
a friend or colleague today.
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