Investment Strategy
Tariff threats and debt drama: How to position portfolios for uncertainty
Key takeaways:
- Last week’s U.S. threats against the European Union and smartphone makers show that tariff talks are far from over. Yet, investors seem to be acclimating to the constant news cycle.
- Trump's "One Big, Beautiful Bill" aims to extend the 2017 tax cuts, potentially adding over $3 trillion to U.S. debt. Just days before it passed in the House, Moody's downgraded its U.S. sovereign credit rating, highlighting the growing fiscal challenges and concerns. In turn, yields have spiked, and the dollar has continued weakening.
- To navigate these challenges, consider diversifying into international markets, boosting gold holdings, and investing in infrastructure for stable, inflation-hedged returns.
2025 has brought the drama. Last week was no different as the market's attention swung from tariffs to U.S. fiscal concerns and back again.
It all started with Moody’s downgrading U.S. government debt, followed by the narrow passage of President Trump’s “One Big, Beautiful Bill” in the House of Representatives, potentially adding over $3 trillion to the national debt. These developments sent bond yields soaring globally, especially in countries with heftier deficits like the U.S.
By Friday, the drama escalated with Trump’s tariff threats targeting smartphone makers and the EU. However, the swift pause on EU tariffs a few days later, extending until July, suggests these threats were more about strategic negotiation.
Below, we explore both events, the market implications, and how investors can navigate this "comfortably uncomfortable" landscape—a key theme of our Mid-Year Outlook. While macro conditions aren't alarming, the uncertainty highlights the need for resilient portfolios.
The round-trip of tariff twists, turns, and tactics
Last Friday, President Trump stirred the pot with two significant tariff threats, delivered via social media.
The first salvo was a 25% tariff on smartphones, targeting giants like Apple and Samsung unless they shift production to the U.S. Trump implied that the cost would fall on the companies, not the exporting countries, marking a departure from previous tariff strategies and aligning with traditional economic thought that tariffs hit importers and consumers hardest.
The second was a bold recommendation for a 50% tariff on EU imports, which was swiftly paused just two days later after talks with European Commission President von der Leyen. That suggests the move was more of a strategic reset in negotiations rather than a firm policy shift—echoing recent U.S.-China negotiations where initial high tariffs were dramatically reduced from 145% to 30%.
The playbook is becoming familiar: start big, create leverage, then negotiate down.
The EU is now fast-tracking trade talks to prevent further escalation. A jump to 50% would mark a significant and onerous shift. The U.S. effective tariff rate on EU imports began 2025 at 1.5%, surged to 15-20% with "Liberation Day" reciprocal tariffs, and now sits around 9% after the global 90-day pause announced on April 9. The latest postponement from June 1 to July 9 also coincides with the end of that global tariff pause, further indicating an underlying negotiating strategy.
Tariff threats have been quickly followed by negotiation—and only partial materialization
U.S. effective tariff rate on imports from China and the European Union, %
Sources: PIIE, Bloomberg Finance L.P. Data as of May 27, 2025.
To boot, the European stocks bounced back; the Euro Stoxx 50 erased all its losses on Monday from Friday’s announcement and is up over 10% this year (in local currency terms). Meanwhile, the S&P 500 has surged close to 20% from the lows of the tariff tantrum, now nearing flat for the year.
The message: Investors are growing accustomed to Trump's threats, often betting they won't fully materialize. Yet, policy uncertainty remains a live wire, cautioning against complacency.
Economic data may soon reflect the risks. While our high-frequency data monitors aren't showing widespread macro friction yet, existing tariffs are substantial, marking the biggest trade restrictions since WWII. We don’t foresee a recession but expect clearer effects this summer as inventories deplete and pricing pressures rise. This aligns with our outlook of structurally higher tariffs—around 15% across all U.S. trading partners.
The White House has notably positioned tariffs as a revenue source to offset large government spending plans; yet, the math doesn't quite add up. Yale’s Budget Lab estimates tariffs could generate up to $2 trillion over ten years, but even in the best-case scenario, the national debt continues to rise.
With trade and budget deficits intimately linked, the start of last week also showed how investors are taking increasing notice of rising fiscal risks.
The “One Big, Beautiful”—and costly—bill
Last week began with Moody’s downgrading of U.S. government debt, following S&P in 2011 and Fitch in 2023. Adding to fiscal concerns, the House narrowly passed Trump's "Big, Beautiful Bill," fast-tracked through budget reconciliation. The bill seeks to extend tax cuts, increase defense and border security spending, and tighten social safety net eligibility, while proposing a $4.0 trillion debt ceiling hike, with the ‘X-date’—when the U.S. Treasury may run out of funds—looming in late summer. It now heads to the Senate, where Republicans face division over permanent tax cuts and spending reductions, yet political pressure is mounting for swift passage.
In response, yields spiked globally, particularly in longer-dated maturities, steepening yield curves. The most pronounced shifts occurred in countries with larger deficits, notably the U.S., where the 30-year Treasury yield reached 5.15%—a level not seen since 2023, and before that, 2007 ahead of the Global Financial Crisis. Meanwhile, shorter-dated sovereign bonds fared better, with 2-year Treasury yields falling over the week, and the dollar continuing its weakening trend.
The crux of the concerns: Ever-rising debt, with no concrete plan to reverse the trend. The Congressional Budget Office estimates the bill could add $3.8 trillion to U.S. debt over the next decade. Proposed cuts in agriculture, education, and energy might reduce the total cost to $3.2 trillion over ten years, or $320 billion annually. That means that simply maintaining the current deficit level would require tariffs to generate $26.6 billion in monthly revenue—with current collections falling well short.
To that end, the U.S. government is like a borrower with a platinum credit card—no spending limit, payments still being made, and credit still solid. While there's no immediate panic, the balance keeps rising, and lenders are starting to raise borrowing rates amid growing concerns about fiscal sustainability.
Tariff collections aren’t enough to cover deficit shortfall
Monthly tariff collections, $ millions
Sources: Haver Analytics, Daily Treasury Statement. Data as of May 21, 2025. Note: monthly tariff collections calculated as a $3.2 trillion increase in the deficit over 10 years, according to the Penn Wharton Budget Model, Congressional Budget Office, Joint Committee on Taxation, and House Committees.
Currently, the deficit is outpacing economic growth, with its share of GDP surpassing nominal GDP growth, indicating a swelling debt stock relative to the economy. Yet, there's a silver lining: The government’s average interest rate remains below GDP growth, meaning borrowing costs haven't yet overtaken growth. However, if borrowing costs eventually exceed GDP growth, the debt stock could accelerate, posing a more significant fiscal challenge.
Overall, these developments don't drastically alter the broader outlook, as fiscal risks are well-known. However, the news underscores ongoing upside risks to U.S. bond yields and the dangers of concentrating investments in one market.
Investing in a comfortably uncomfortable world
In a world marked by policy uncertainty, fiscal challenges, and shifting capital flows, maintaining a steadfast long-term investment strategy is essential. While markets are moving fast, it's not too late to adjust your positioning. Focusing on resilient assets that offer increased income and uncorrelated returns can be beneficial. Here are three strategies we’ve been focused on this week:
Here are three ways to achieve this:
1. Dollar diversification: As global investors reassess their asset allocations, the dollar has faced pressure given it spends more than it earns (a budget deficit) and imports more from other countries than it exports (a trade deficit). To cover these gaps, the U.S. needs money from foreign investors. This reliance on outside funding makes the dollar vulnerable—notably even relative to its G10 peers.
The U.S. relies heavily on external financing relative to G-10 peers
Sovereign yields relationship to twin deficits
Source: Bloomberg Finance L.P. Data as of May 22, 2025.
Over the past decade, investors have flocked to U.S. assets, attracted by strong returns or simply neglecting to rebalance. But now, the tides are turning as foreign investors begin to explore opportunities beyond U.S. borders. This shift underscores the importance of diversifying your investments internationally and considering currency hedging. Diversification can offer smoother, more consistent returns, reducing the risk of over-concentration and enhancing the benefits of compounding over time. Beyond the U.S., we believe stock markets in Europe and Japan could be poised to reach new highs this year.
2. Gold: Gold has surged roughly 25% this year, driven by heightened uncertainty and strong central bank demand—a key pillar of gold's bull run over the past couple of years. Despite this demand, many central banks, including China, hold less than 7% of their reserves in gold, while Germany and the U.S. maintain over 75%. This gap presents an opportunity for growth—evidenced by China's recent record gold imports. We expect this trend to persist.
We believe gold remains a reliable diversifier, offering resilience against geopolitical risks and rising deficits.
3. Infrastructure: Infrastructure investments often embed a natural hedge against inflation through long-term contracts. Historically, over 40% of infrastructure returns come from income, which may offer stability for suitable investors amid bond market volatility. Since Q2 2008, infrastructure has consistently delivered low double-digit annual returns. Better still, such funds tend to be global, offering another way to diversify across regions and currencies.
Questions on how to build resilience in your portfolio? Reach out to your J.P. Morgan team.
RISK CONSIDERATIONS
All market and economic data as of May 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.
- Holders of foreign securities can be subject to foreign exchange risk, exchange-rate risk and currency risk, as exchange rates fluctuate between an investment’s foreign currency and the investment holder’s domestic currency. Conversely, it is possible to benefit from favorable foreign exchange fluctuations.
- Investments in commodities may have greater volatility than investments in traditional securities. The value of commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Investing in commodities creates an opportunity for increased return but, at the same time, creates the possibility for greater loss.
Important Information
Tariff turmoil and a new tax bill have heightened investor anxiety. Here's how to position your portfolio against the risks.
Madison Faller
Global Investment Strategist
Matthew Landon
Global Investment Strategist
Alan Wynne
Global Investment Strategist
Published May 27, 2025
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