Investment Strategy
Playing the trump card: Stocks face off against uncertainty
It felt like the week that would never end as investors scrambled to adapt to new policy realities. At one point, the S&P 500 plunged into correction territory, down 10% from its highs in just sixteen days, marking its first correction in two years and its seventh-fastest since 1929.1
The spike in volatility follows heightened optimism at the year's start, with frothy valuations leaving little room for error. As risks have rapidly shifted, markets have struggled to recalibrate.
The DeepSeek drama hit big tech hard, and anxiety has since grown as policymakers play their ‘trump cards,’ engaging in tit-for-tat tariff battles that have soured sentiment and reignited taboo U.S. recession questions. Yet, uncertainty has also spurred action. Europe is seizing the moment, crafting historic stimulus and ceasefire plans. China has also felt a growth boost thanks to policymaker support. Overall, that’s led to a more balanced view of global growth – and markets.
While U.S. stocks are down so far this year, a global 60/40 stock-bond allocation is up nearly 1%.2 The Euro Stoxx 50 and the MSCI China have posted double-digit gains. Bonds have been a reliable shield, with U.S. core bonds up over 2% year-to-date. Meanwhile, gold soared to a record $3,000/ounce last week. The key message: diversification is the best defence.
Below, we explore the risks, the opportunities, and how building resilient portfolios can help navigate uncertainty.
Trade war roulette: The wheel keeps spinning
As tit-for-tat moves intensify, the potential impact grows—not just economically, but through policy uncertainty. Last week offered little comfort:
- President Trump initially doubled tariffs on Canadian steel and aluminium to 50%, then reverted to 25% after Ontario suspended its retaliatory tariff.
- A 25% tariff on steel and aluminium proceeded globally, prompting the EU to announce tariffs on €26 billion of U.S. goods for April, and Canada to plan levies on $20.8 billion of U.S. goods.
- Trump then threatened a 200% tariff on European Union (EU) alcoholic beverages and reiterated plans for ‘reciprocal’ tariffs next month.
The already imposed tariffs on Chinese imports, non-USMCA compliant Canadian and Mexican imports, and steel and aluminium have driven the U.S. effective tariff rate to its highest level since the 1970s. Those moves stand to modestly boost inflation, squeeze consumer purchasing power, and pressure economic growth. Our Investment Bank projects that current tariffs could raise headline consumer prices by 0.2% this year,3 felt mostly in the second quarter. Core inflation, particularly on goods, could feel more impact, though price hikes may take months to reach retail shelves.
We don't think such a moderate tariff-induced spike in inflation will deter the Fed from easing policy. Yet, it can’t be ignored that rising policy uncertainty has already coincided with declining expectations for U.S. business activity and recent cracks in consumer sentiment. Our estimates suggest U.S. GDP growth could see a 0.3% hit this year from the implemented moves, with larger impacts if further tariffs are realised.3
This prompts the question: Are the recent gloomy indicators a sign of economic doom, and how long can the U.S. economy's strength last?
U.S. exceptionalism: a losing hand or a strategic pause?
At the year's start, hopes were high for sustained U.S. exceptionalism, buoyed by 2024's robust momentum and campaign promises of business-friendly policies like deregulation and tax cuts. The reality has been more turbulent.
Much ado has been made about declining sentiment, and it's not for nothing. Recent ‘soft data’—reflecting perceptions, opinions, and expectations for economic conditions—have been disappointing. Last week, NFIB's small business sentiment index fell at its fastest pace in five years, and the University of Michigan's consumer sentiment gauge declined for the third month, with inflation expectations reaching multi-year highs. That’s heightened overall U.S. economic uncertainty, and President Trump's remarks last week about the economy being in a ‘period of transition’ added to the anxiety.
Higher uncertainty is weighing on U.S. confidence
Economic Policy Uncertainty Index, U.S. vs. Europe
Source: Baker, Bloom & Davis, Bloomberg Finance L.P. Data as of February 28, 2025. The Baker, Bloom and Davis index of economic policy uncertainty is based on the frequency of newspaper references to policy uncertainty.
Yet, 'hard data'—reflecting actual economic activity, such as the labor market—are solid, even if slowing. Corporate profits have likewise demonstrated resilience, with Q4 earnings showing an 18% year-over-year increase, well above initial expectations. This indicates the economy is starting from a position of strength. However, the risk is that weakening sentiment could eventually become a self-fulfilling prophecy, as fears of the future prompt slower spending. We don’t believe we're at that point yet—growth is far from collapsing and rough estimates suggest the transition from 'soft' to 'hard' data could take another four to six months, if it materialises.
The ‘hard data’ is still holding up
U.S. economic indicator values and assessment
Source: Bloomberg Finance L.P., J.P. Morgan Wealth Management. Data as of March 13, 2025.
As the Fed gears up for its meeting this week, it faces the challenge of addressing these developments and balancing growth and inflation risks. While its forecasts may adjust, the consistent strength of 'hard data,' especially in the jobs market, reassures us that 'stagflation' or 'recession' aren't ‘doom’-worthy concerns.
Europe’s countermoves: stimulus and ceasefire plans on the table
With U.S. exceptionalism losing its edge, Europe has stepped up. Optimism has grown thanks to a historic shift in Germany, cautious hopes for peace in Ukraine, and so-far limited U.S. tariff impacts.
Chancellor-in-waiting Friedrich Merz secured the necessary backing for a transformative defence and infrastructure spending plan. With a vote planned for Tuesday and approval expected, Merz has declared, ‘Germany is back,’ with a boost to growth that could ripple across the region. While other European countries face higher debt burdens and less room for stimulus, defence spending remains a priority, and elevated uncertainty could foster political cohesion for bloc-wide support.
Geopolitical tensions have been a big driver of the focus. Cautious optimism has been growing for peace in Ukraine. Following U.S.-brokered talks last week, Ukraine agreed to a 30-day ceasefire. Although Russia has yet to agree, a ceasefire could improve sentiment and reduce energy costs if gas flows through Ukraine resume. Meanwhile, despite looming tariff threats, the euro area has experienced limited impact so far, with steel and aluminium tariffs affecting less than 0.2% of EU GDP.4
Notably, sentiment has been bolstered by fundamental strength, with Q4 marking the first quarter of profit growth in nearly two years. Together with policymakers’ recent moves, that’s propelled European stocks ahead of their U.S. counterparts, narrowing the historically wide valuation gap between the two markets. If optimism continues and the European Central Bank continues incremental rate cuts, the rally could extend further. That said, the euro area isn’t immune to a U.S. growth slowdown and potential 'reciprocal' tariffs—dynamics we are closely monitoring.
Diversification is defensive
Policy changes are prompting disruption, uncertainty is high, and risks have risen. U.S. growth is cooling (but not collapsing), while Europe and China see brighter prospects with government support. Tariff concerns are weighing on U.S. confidence, altering how investors weigh the risks. Concentration in U.S. markets has also been a drag as big tech faces challenges.
While some investors might wait for the dust to settle, sitting in cash can hinder long-term returns. History shows that corrections are natural – and most don't lead to recessions. Over the past 45 years, U.S. stocks have seen a 14% pullback on average, yet still ended the year higher 75% of the time. Even strong years have tough moments. Although prolonged uncertainty can be a drag, we believe it's far too early to discuss a U.S. recession. Even with the current soft patch and various risks, we still think earnings strength will boost the S&P 500 by about 15% from where it sits today. Notably, the pullback has also realigned equity valuations with their five-year averages.
Preparing for known unknowns was central to our 2025 Outlook, with diversification crucial for building resilient portfolios. Varying investments across regions, sectors, and asset classes has been beneficial this year, and past market shocks reinforce the message. Bonds can provide stability if growth softens. Beyond the 60/40, enhancing stock-bond allocations with other assets may also bolster portfolios. Infrastructure investments historically offer low correlation to stocks, stable cash flows, and an inflation hedge. Gold has been shining amid the volatility, further supported by central bank purchases. Hedge funds can provide unique return streams.
Navigating uncertainty can be frustrating, but volatility can also offer opportunity. Your JPMorgan team is here to discuss the outlook and how your portfolio is positioned for the year ahead.
1 Bloomberg Finance L.P. ‘Stocks Tumble Into Correction as Trump Policies Roil Sentiment.’ 13th March 14 2025.
2 Global 60/40 sock bond allocation proxied by the iShares Core 60/40 Balanced Allocation ETF.
3 J.P. Morgan Corporate Investment Bank. ‘Hold the champagne: revising down US GDP growth.’ 14h March 2025.
4 J.P. Morgan Corporate Investment Bank. ‘Euro Area.’ 14h March 2025.
All market and economic data as of March 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.
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Policy changes are prompting disruption, uncertainty is high, and risks have risen. Are you prepared?
Madison Faller
Global Investment Strategist
Published Mar 17, 2025
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