Tariff implications for investors: Building a resilient portfolio amid pullbacks

Last week, the S&P 500 fell (-2.3%), marking its first 10% correction in two years as investors reassess the market outlook amid tariff announcements.

President Trump has threatened to enact a 200% tariff on European alcoholic beverages. He also announced he would not repeal tariffs on steel and aluminum that took effect last week, or the reciprocal tariffs on global trade partners set to start on April 2. In response, Canada announced a retaliatory 25% tariff on approximately C$30 billion of U.S.-made products, including steel and aluminum. The European Union has also announced plans to impose retaliatory tariffs on $28.3 billion worth of goods, targeting politically sensitive goods in Republican-led states, including soybeans, beef and poultry.

Amid the volatility, fixed income has proven to be a ballast for portfolios, with yields across the curve declining. Year-to-date, the 2-year yield is down 23 basis points to 4.01% and the 10-year yield is down 26 basis points to 4.30%.

Investors are grappling with whether recent market activity is a valuation adjustment or a more material economic issue. Below, we share our thoughts on why we believe it’s the former.

Markets were priced with little room for error. At the start of the year, the S&P 500 traded around 22.5x, the highest multiple in the last 20 years outside of the COVID period. Now, the S&P 500 is down about 10% from its February highs.

We believe the pullback in equity markets is due to heightened uncertainty, escalating tariff risks and new skepticism around U.S. tech dominance. The correction has brought index multiples to their five-year average of 20x as investors have priced in more risks.

It’s important to remember that pullbacks like this are a feature of healthy market functioning, not a bug. Over the last 15 years, we have experienced four different growth scares, none of which led to a recession. Our base case is that the current growth slowdown will fall into the same category.

No one knows when and where the bottom will be, but historically, in the six months following growth scares, the S&P 500 rallied 24% on average from the trough. We think it’s prudent for investors to leg in over time to avoid missing the subsequent rally. Another sign that it could be time to buy: When bullish sentiment (using the AAII bull/bear survey as a gauge) drops below 20%—currently at 19%—the S&P 500 has rallied 90% of the time over the next 12 months, averaging a 17% return.

To get comfortable with the equity market, one must be comfortable with the direction of the economy.

Recently, “soft data” indicators—reflecting perceptions, opinions and expectations for economic conditions—have been disappointing. Meanwhile, “hard data” indicators—providing insight into realized economic activity, such as employment figures and retail sales—are generally holding up well. The resilience of the hard data suggests that the economy is starting from a position of strength.

Will tariffs cause inflation to spike? Our view on tariffs is that they pose a risk to inflation, but price pressure would be concentrated in goods, differing from the inflation seen after COVID, which was driven by a tight labor market and rising wages. The risk is that inflation expectations rise, but we believe tariff-driven goods inflation wouldn’t prevent the Federal Reserve from easing policy if the hard data and labor market weakens.

So what is the downside case? Here’s what we’re watching in addition to the hard data for signs that this may be more than just a correction:

• Credit spreads: Investment grade credit spreads have only widened by 10 basis points (bps) year-to-date, about half the move during last summer’s labor market concerns. Despite some initial widening, both IG and high yield indices remain near all-time tights. For context, both IG and HY spreads reached recent wides of +190 bps and +615 bps, respectively, in 2022 on concerns of rising inflation and a potential growth slowdown driven by rising base rates.
• Rates: If we saw a material slowdown in the hard data, yields would have room to fall further. Markets are currently pricing less pessimistically than during the Sahm rule saga last August. During that time, the 10-year was 40 bps below current levels. We see the 10-year Treasury going to roughly 3.40% (versus 4.30% today), assuming a rise in the unemployment rate to ~5% and Fed cuts that bring its policy rate down to 2.5%. If our base case comes to fruition, core bonds could deliver their carry (yield) for investors, with a slight detraction from price appreciation—investors would still get a positive return in that scenario. In a growth slowdown scenario, longer-duration assets could reach double-digit returns as yields fall.