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Since the Trump administration’s tariff announcement on April 2, investors around the world have been grappling with extreme market volatility. The situation has become a fast-changing global trade war that has triggered recession fears, deleveraging and concerns about bond market liquidity, and a historic tariff turnaround that delivered the S&P 500’s third largest one-day gain since World War II.
In only a handful of sessions, tariff turmoil destroyed $10 trillion in stock market value before President Trump pivoted on April 9, giving countries (except China) a 90-day reprieve on the additional country-specific reciprocal duties, but keeping the minimum 10% baseline rate. The top two U.S. trading partners, Mexico and Canada, remain subject to a 25% levy for non-compliance with the USMCA agreement that Trump negotiated during his first term.
Wall Street underestimated the aggressive moves initiated by Trump’s “Liberation Day,” which developed into a high-stakes showdown with China and a developing battle with the European Union. Economic slowdown concerns remain as several tariffs stay in place for the auto industry, steel, and aluminum.
While the White House asserts that trade deals with several countries are almost finalized, the United States is still expected to launch tariffs on other sectors including clean energy, copper and derivative products, and digital services. The White House also has imminent plans to launch Section 232 investigations on both semiconductor chips and pharmaceuticals, and many analysts believe these will be followed by further Chinese levies and European countertariffs that could also target sectors and specific U.S. companies.
Source: AlphaSense Generative Search (April 14, 2025)
Within two months, analysts went from debating how much stocks would benefit from U.S. exceptionalism to de-risking every asset class. Financial markets are now trying to price in ongoing trade tensions that could trigger effects including potential recession, labor market weakness, and a decoupling of the world’s two largest economies.
Earnings Will Likely Signal Tariff Damage
Tariff volatility is expected to set a gloomy mood this earnings season as both consumer and corporate confidence has recently weakened. Earnings reports this season from Delta, CarMax, and Constellation Brands either delivered disappointing outlooks or pulled guidance due to broad economic uncertainty.
As the global trade war continues to evolve, many companies with significant exposure to China will need to determine their respective impacts from the 145% combined duties on Chinese goods. While there is optimism that many countries could reach a trade deal with the United States, there remains uncertainty surrounding what could come next for tariffs, which could include pharmaceuticals, semiconductors, lumber, and other critical minerals. According to European Commission President von der Leyen, the EU wants to give negotiations a chance, but should talks not prove satisfactory, their countermeasures will kick in. Tariff anxiety has caused many analysts to lower their views on several sectors, especially banks, as economic slowdown fears could lead to reduced loan growth, increased loan defaults, and on margin compression.
A recent Generative Grid search within the AlphaSense platform shows how companies are being affected by tariffs and how they are trying to protect their margins.
Source: AlphaSense Generative Grid (April 14, 2025)
Trump’s Fiscal Agenda
Financial market chaos has not disrupted the White House plan to fast-track Trump’s planned tax cuts and deregulation agenda, which includes changes across the financial, energy, pharmaceutical, and technology sectors, as well as environmental policy. President Trump is closer to advancing his fiscal package, which includes new tax cuts, extending expiring ones, spending cuts, as well as increased budgets for defense, border enforcement, and energy investments. The passing of the amended budget resolution sets the budget framework for trillions of dollars in tax cuts and raises the debt ceiling.
The process of outlining spending cuts and increases over the next 10 years will begin once Congress returns from Easter recess. The budget resolution included a plan of up to $5.3 trillion in tax cuts over the next decade, which sets the stage for Republicans to debate making them permanent with spending cuts or front-loading them in the early years. Enacting the fiscal package will require both chambers to incorporate all the bills into one, which means its passage will need to satisfy the group of fiscal hawks in the House.
Trade War Keeps Fed in Wait-and-See Mode
Wall Street expectations for Fed action have been extremely volatile in April. During the peak financial market turmoil, some on the Street believed the Fed may have to deliver an emergency rate cut on fears the global trade war would lead to a global recession. However, on April 4, Fed Chair Powell signaled that policymakers will not rush to react and will need to wait to see if the temporary shock to prices becomes more persistent.
Economists have been slashing their U.S. economic growth forecasts and raising their odds for a recession. The U.S. labor market could see a rise in the unemployment rate if tariff escalation leads to lasting harm to import-sensitive small businesses and inflation.
The March inflation report highlighted an unexpectedly benign reading, which was supported by a plunge in gasoline prices. The Fed most likely overlooked the March inflation report that showed a sharp drop in the year-over-year reading, as pricing pressures are expected to show up with next month’s report.
Tremendous tariff uncertainty clearly remains and that should keep Fed interest rate expectations volatile, but the Fed seems poised to hold rates steady for now. Analysts’ expectations over what the Fed will do with monetary policy for the rest of the year is rather divergent as broker research forecasts range from no cuts in 2025 to as many as four quarter-point cuts.
Read all posts written by Ed Moya
