Will high tariffs push the US into recession?
As a trade war rages, a massive market sell-off in the US and around the world raises many questions for investors.
April 9, 2025
Insight
US stocks bear the brunt of global economic uncertainty
April 22, 2025
Key takeaways
US stocks fall
US stocks fell last week, while stocks in Europe, the UK, Japan, and China all rose.
Monetary policy
There has been more monetary policy support in Europe and the UK than in the US so far this year, and likely more to come.
Fiscal policy
Fiscal stimulus will likely be increasing in the eurozone, the UK, and China, while the US aggressively cuts federal spending.
Last week saw US stocks fall while stocks in other regions rose — some quite significantly. While the MSCI USA Index fell 1.4%, the MSCI Europe Index, the MSCI UK Index, the MSCI Japan Index, and the MSCI China Index all posted material gains.1 Why are US stocks behaving so differently than other stocks in other regions when European Central Bank (ECB) President Christine Lagarde admitted just last week that “the economic outlook is clouded by exceptional uncertainty”?2 Here are a few thoughts:
1. Monetary policy support
There’s more monetary policy support being provided to the European economy — as evidenced by the ECB’s rate cut last week — than the US economy so far this year, and that’s likely to continue. This was the ECB’s seventh cut in the course of its last eight meetings, and it seems ready to lower rates again if necessary. We also got a rate cut from the Bank of England in February, and we could see more this year. Conversely, the Federal Reserve (Fed) hasn’t cut rates thus far in 2025 and appears more comfortable waiting to see the impact of tariffs on the US economy before easing monetary policy. As Fed Chair Jay Powell explained last week, “As that great Chicagoan Ferris Bueller once noted, ‘Life moves pretty fast.’ For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance.”3
2. Fiscal policy support
Fiscal stimulus is expected to increase in the eurozone and even the UK, with increased defense spending becoming a priority, as well as in China, as policymakers focus on increasing domestic consumption and combating headwinds created by US tariffs. Chinese economic growth was strong — better than expected — but it’ll take significant stimulus to counter the headwinds of high tariffs. Conversely, the US is still aggressively cutting federal spending, which is certainly not stimulative. And any potential tax cuts may not be an adequate countervailing force to this substantial drop in government spending.
3. Valuations
Valuations have been much higher for US stocks than for stocks of other regions. For example, the MSCI USA Index recently had a trailing price-to-earnings (P/E) ratio of 25.11 and a forward P/E ratio of 20.53.4 Compare that to other major indexes:4
- MSCI Europe Index: Trailing P/E ratio of 15.53 and forward P/E ratio of 13.73
- MSCI UK Index: Trailing P/E ratio of 13.27 and forward P/E ratio of 11.94
- MSCI Japan Index: Trailing P/E ratio of 13.74 and forward P/E ratio of 13.55
- MSCI All-Country World Index: Trailing P/E ratio of 20.57 and forward P/E ratio of 17.23
Some investors may be able to ignore, or at least tolerate, high valuations for long periods of time. However, in periods of significant uncertainty, valuations can matter more. In this environment of “exceptional” uncertainty, investors may be even more unforgiving when it comes to high valuations.
4. US policy uncertainty
Policy uncertainty can have a chilling effect on business investment and hiring plans. We saw that during the tariff wars in the first Trump administration. This time around, the tariff levies are broader and deeper, and the uncertainty is much greater. For example, last week Goldman Sachs’ CEO shared, “The prospect of a recession has increased with growing indications that economic activity is slowing down around the world. Our clients, including corporate CEOs and institutional investors, are concerned by the significant near-term and longer-term uncertainty that has constrained their ability to make important decisions.”5 And US policy uncertainty is increasing by the day, with recent fears arising that President Donald Trump will fire Fed Chair Jay Powell, which could be very negative for markets. In short, this level of policy uncertainty can be very destabilizing and runs counter to the US government’s historical role as a stabilizing force for the economy and markets.
5. US consumers
The epicenter of the tariff wars is likely to be the US consumer, and that’s going to be problematic for an economy that’s so heavily dependent on consumer spending. That’s particularly so if we see a material increase in unemployment, which could result from current fiscal policy. We saw a “pull through” of US spending in March, with better-than-expected retail sales, but that may only add to headwinds facing retail sales going forward.
Looking ahead
Looking ahead, there’s likely to be more volatility and uncertainty, especially in the US. It’s important for investors to focus on their investing time horizon, which is typically far longer than an average recession or a presidential term. It’s also important to remember key concepts such as maintaining one’s investment policy, remaining well diversified, rebalancing regularly, and even looking for opportunities to take advantage of the uncertainty and volatility.
Dates to watch
Date |
Report |
What it tells us |
|---|---|---|
April 21 |
US Leading Economic Indicators Index |
Provides an early indication of significant turning points in the business cycle and where the economy is heading in the near term. |
April 22 |
Eurozone Consumer Confidence |
Tracks sentiment among eurozone consumers. |
|
Japan Manufacturing Purchasing Managers’ Index (PMI) |
Indicates the economic health of the manufacturing sector. |
|
Japan Services Purchasing Managers’ Index (PMI) |
Indicates the economic health of the services sector. |
|
Australia Manufacturing Purchasing Managers’ Index (PMI) |
Indicates the economic health of the manufacturing sector. |
|
Australia Services Purchasing Managers’ Index (PMI) |
Indicates the economic health of the services sector. |
April 23 |
Eurozone Manufacturing Purchasing Managers’ Index (PMI) |
Indicates the economic health of the manufacturing sector. |
|
Eurozone Services Purchasing Managers’ Index (PMI) |
Indicates the economic health of the services sector. |
|
UK Manufacturing Purchasing Managers’ Index (PMI) |
Indicates the economic health of the manufacturing sector. |
|
UK Services Purchasing Managers’ Index (PMI) |
Indicates the economic health of the services sector. |
|
Federal Reserve Beige Book |
Gathers anecdotal information on current economic conditions in Federal Reserve districts. |
April 24 |
US Durable Goods Orders |
Measures current industrial activity. |
|
US Existing Home Sales |
Indicates the health of the housing market. |
|
UK GfK Consumer Confidence |
Measures the level of consumer confidence in economic activity in the UK. |
|
Japan Consumer Price Index (CPI) |
Tracks the path of inflation. |
April 25 |
UK retail sales |
Indicates the health of the retail sector. |
|
Canada retail sales |
Indicates the health of the retail sector. |
|
University of Michigan Survey of Consumers |
Provides indexes of consumer sentiment and inflation expectations. |
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Footnotes
1 Source: MSCI. For the week of April 18, 2025, the MSCI US Index returned -1.40%, the MSCI China Index returned 1.50%, the MSCI Europe Index returned 4.10%, the MSCI UK Index returned 5.40%, the MSCI Japan Index returned 4.80%, and the MSCI Emerging Markets Index returned 2.30%.
2 Source: Reuters, “ECB cuts rates as Lagarde says economic outlook 'clouded by exceptional uncertainty,'” April 17, 2025.
3 Source: Federal Reserve speech transcript, April 16, 2025.
4 Source: MSCI, as of March 31, 2025.
5 Source: The Atlanta Voice, “Stocks slide as Fed Chair Powell warns of impact of tariffs on the economy,” April 16, 2025.
Investment risks
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
Important information
The opinions referenced above are those of the author as of 21 April, 2025.
This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.
Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals, they are subject to change without notice and are not to be construed as investment advice.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.
Diversification does not guarantee a profit or eliminate the risk of loss.
The Summary of Commentary on Current Economic Conditions by Federal Reserve District (the Beige Book) is published eight times per year. Each Federal Reserve Bank gathers anecdotal information on current economic conditions in its district, and the Beige Book summarizes this information by district and sector.
Investments in companies located or operating in Greater China are subject to the following risks: nationalization, expropriation, or confiscation of property, difficulty in obtaining and/or enforcing judgments, alteration or discontinuation of economic reforms, military conflicts, and China’s dependency on the economies of other Asian countries, many of which are developing countries.
The Consumer Price Index (CPI) measures the change in consumer prices and is a commonly cited measure of inflation.
Monetary policy support refers to the actions taken by a central bank, like the US Federal Reserve, to influence the money supply and credit conditions in an economy.
Monetary easing refers to the lowering of interest rates and deposit ratios by central banks.
Fiscal stimulus is government actions aimed at boosting economic activity, typically through increased spending or reduced taxes.
The trailing price-to-earnings (P/E) ratio is a valuation metric that compares a company's current stock price to its earnings-per-share (EPS) over the most recent 12 months.
The forward price to earnings (P/E) ratio is a variant of a company’s price-to-earnings ratio and is calculated by dividing the company’s current share price by its expected earnings, usually for the next 12 months or the next full fiscal year.
Pull through in US spending refers to the indirect economic stimulus or multiplier effect that government spending has on other areas of the economy beyond the initial spending.
The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
Purchasing Managers’ Indexes (PMI) are based on monthly surveys of companies worldwide and gauge business conditions within the manufacturing and services sectors.
The Eurozone Manufacturing PMI® (Purchasing Managers’ Index®) is produced by IHS Markit based on original survey data collected from a representative panel of around 3,000 manufacturing firms. National data are included for Germany, France, Italy, Spain, the Netherlands, Austria, the Republic of Ireland, and Greece.
The Eurozone Services PMI (Purchasing Managers’ Index) is produced by IHS Markit and is based on original survey data collected from a representative panel of around 2,000 private service sector firms. National data are included for Germany, France, Italy, Spain, and the Republic of Ireland.
The UK Manufacturing Purchasing Managers’ Index (PMI) is produced by IHS Markit and is considered an indicator of economic health for the manufacturing sector. It is based on survey responses from senior purchasing executives.
Fluctuations in the price of gold and precious metals may affect the profitability of companies in the gold and precious metals sector. Changes in the political or economic conditions of countries where companies in the gold and precious metals sector are located may have a direct effect on the price of gold and precious metals.
Inflation is the rate at which the general price level for goods and services is increasing.
The MSCI China Index captures large- and mid-cap representation across China H shares, B shares, Red chips, P chips, and foreign listings (e.g., ADRs).
The MSCI Emerging Markets Index captures large- and mid-cap representation in emerging market (EM) countries.
The MSCI Europe Index captures large- and mid-cap representation across a universe of developed market countries in Europe.
The MSCI Japan Index measures the performance of the large- and mid-cap segments of the Japanese market.
The MSCI United Kingdom Index is designed to measure the performance of the large- and mid-cap segments of the UK market.
The MSCI USA Index measures the performance of the large- and mid-cap segments of the US market.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic, and political conditions.
The Survey of Consumers is a monthly telephone survey conducted by the University of Michigan that provides indexes of consumer sentiment and inflation expectations.
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