Economy & Markets
Navigating Tariff Uncertainties: Three Scenarios for Investors
Key takeaways:
The U.S. effective tariff rate is at a post-war high, driving significant market volatility and uncertainty.
- Scenario 1 suggests moderate tariffs with some negotiations, potentially slowing U.S. growth but avoiding recession, with modest stock market gains.
- Scenario 2, the most adverse, involves full tariff implementation, risking a global recession and necessitating defensive investment strategies like core bonds.
- Scenario 3, the least likely but most positive, envisions reduced tariffs, potentially boosting global stock returns and benefiting sectors like tech and energy.
Tariff talk and U.S. policy uncertainty continue to drive market volatility.
As of now, the U.S. effective tariff rate stands at its highest in the post-war era. Yet, the back-and-forth volley of announcements, tit-for-tat retaliation, delays, and exemptions has made it hard to settle on what the end state might look like. In such a fluid environment, humility is key. We acknowledge that the tariff rate is a moving target, swayed by unpredictable elements like policy shifts, potential exclusions, or substitution effects. While the exact, final rate remains elusive, we outline three potential scenarios for the path forward and their market implications.
The ‘current’ U.S. effective tariff rate is less onerous than ‘Liberation Day’
U.S. effective tariff rate, %
Sources: Michael Cembalest “Eye on the Market”, Tax Foundation, JPM Global Economics, GS Global Investment Research. Data as of April 16, 2025. Liberation Day tariff rate is as of April 2nd and does not include exclusions or substitution effects. The current tariff rate adds a +10% tariff on most of the world; +125% on China and incorporates announced exclusions by the U.S. by product and a 70% substitution away from China (40% country; 30% US). The White House announced exclusions and small rate adjustment incorporates White House exclusion announcements and the change in rates for China and RoW.
Scenario 1: Some tariffs, some negotiations
Our base case scenario envisions a landscape where some deals are struck between the U.S. and its trading partners, with substitution effects softening the blow of some statutory tariff rates. We anticipate that the effective U.S. tariff rate would settle between 10-20% in this scenario, a notable rise from the year's start at approximately 2%. This scenario, while challenging, aligns with many of Wall Street's pre-‘Liberation Day’ estimates.
In this context, U.S. growth is likely to slow notably, with potentially higher unemployment and inflation. However, we still think a recession can be avoided. Market volatility would persist, impacting corporate profits. That said, we still see upside for stock markets as investors react to dealmaking, potentially increasing by mid-to-high single digits higher. We’d also expect central banks to cut rates in a measured fashion, U.S. and European bond yields to trend lower, and the U.S. dollar to weaken slightly further.
To manage through the swings, some investors might look to structured notes that are linked to stock markets, which can offer a downside buffer, enhanced income, and even still some upside exposure. Meanwhile, gold has continued to hit new record highs, adding to its long-standing reputation as a geopolitical hedge. As central banks also add more gold to their own balance sheets, it could find further structural support.
Meanwhile, hedge funds can also be a powerful tool here, designed to not just weather the storm but also take advantage of it. With stock and credit valuations high and volatility elevated, it’s a hedge fund manager’s hunting ground to capitalize on hidden value. In doing so, returns may also be less correlated to moves in public stocks and bonds.
Scenario 2: The full force of tariffs
The full implementation of tariffs, coupled with partial retaliation from trade partners, represents the most adverse scenario in our view. Should the April 9th reciprocal tariffs remain in effect, the U.S. effective tariff rate could exceed 20%.
This scenario could lead to increased prices, reduced consumer spending, diminished business confidence, delayed investments, economic demand destruction, job losses, and potentially a U.S. and global recession.
In turn, we’d anticipate significant rate cuts from both the Federal Reserve and the European Central Bank, declining bond yields, a meaningful drop in global stock markets, and continued weakening of the U.S. dollar.
Defensive positioning would be essential for investors. While cash might feel comforting during times like these, it can’t insulate portfolios against growth shocks – but core bonds can. Offering stability and income, bonds can serve as a safe haven for capital preservation amid uncertainty, especially as interest rates likely fall in such a downturn.
Scenario 3: A positive resolution
A positive resolution, with tariffs delayed or less economically burdensome than anticipated, could restore market confidence. In this scenario, we foresee the U.S. effective tariff rate declining to below 10%.
We think this scenario is least likely but most positive for risk assets, potentially driving global stock returns beyond 20%. Central banks might still implement a few rate cuts, while bond yields remain rangebound, and the dollar recovers some recent losses. Sectors of the market that were most adversely affected, mega-cap tech, small caps, and energy, could emerge as beneficiaries.
Growth-sensitive and U.S. assets have lagged
Asset performance, %
Source: Bloomberg Finance L.P. Data as of April 22, 2025. Gold: Gold Spot $/Oz; China offshore equities: Hang Seng Index; U.S. aggregate bonds: Bloomberg U.S. Aggregate; European equities: Euro Stoxx 50; S&P 500 equal-weight: S&P500 Equal Weighted IX; USD: Dollar Index Spot; S&P 500: S&P 500 Index; Nasdaq 100: NASDAQ 100 Stock INDX; Brent Crude: Generic 1st 'CO' Future; Small caps: Solactive US 2000; Magnificent-7: BBG Magnificent 7 TR USD. Outlooks and past performance are no guarantee of future results. It is not possible to invest directly in an index.
The situation remains dynamic, and any of these scenarios are possible. Our investment guidance emphasizes strategies to manage volatility and diversify portfolios, including expanding global asset and currency exposure and incorporating uncorrelated assets like gold and hedge funds for eligible investors. In a significant market downturn, core fixed income can offer resilience to multi-asset portfolios. Equity-linked structured notes may provide downside hedging while maintaining attractive return potential.
For questions on best positioning your portfolio, your J.P. Morgan team is here to help.
RISK CONSIDERATIONS
All market and economic data as of April 2025 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.
We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.
- Past performance is not indicative of future results. You may not invest directly in an index.
- The prices and rates of return are indicative, as they may vary over time based on market conditions.
- Additional risk considerations exist for all strategies.
- The information provided herein is not intended as a recommendation of or an offer or solicitation to purchase or sell any investment product or service.
- Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan. This material should not be regarded as investment research or a J.P. Morgan investment research report
- The information presented is not intended to be making value judgments on the preferred outcome of any government decision or political election.
- The price of equity securities may rise or fall due to the changes in the broad market or changes in a company's financial condition, sometimes rapidly or unpredictably. Equity securities are subject to "stock market risk" meaning that stock prices in general may decline over short or extended periods of time.
- International investments may not be suitable for all investors. International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Some overseas markets may not be as politically and economically stable as the United States and other nations. Investments in international markets can be more volatile.
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Important Information
Amid rapid policy changes, we’re refining our views on global economies and markets.
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