Investment Strategy

Where will tariff rates settle? Three scenarios explained

U.S. large-cap stocks couldn’t maintain last week’s momentum.

Heading toward the week’s close, the S&P 500 (-1.6%) and Nasdaq 100 (-2.3%) fell during the shortened trading week. The relief investors felt from a delay in consumer and industrial electronics tariffs was short-lived, as this week those delays were confirmed to be temporary.

Also weighing on investor sentiment was Federal Reserve Chair Powell’s Wednesday speech, which delivered a slightly more hawkish tone. It may indicate that the central bank is unwilling to change its policy rate, given current economic conditions, despite pressure from the Trump administration.

Globally, European (+3.1%) and Chinese offshore (+0.7%) equities continue to perform well, possibly due to a shift away from U.S. dollar-denominated assets amid uncertainty.

In commodities, gold (+3.6%) continues to shine. The precious metal passed $3,350 for the first time ever this week and is up nearly 30% this year. As investors, including central banks, continue to consider diversifying away from Treasuries amid heightened uncertainty, gold has been the main beneficiary.

As tariffs continue to dominate headlines, including “big” progress with Japan and little progress with Europe this week, along with market swings, we break down three tariff scenarios and what they could mean for your portfolio.

We believe changes in the U.S. effective tariff rate and their impact on global trade drive market volatility. This is why the chart below, championed by Michael Cembalest, our Chairman of Market and Investment Strategy, is crucial for Wall Street strategists this year.

Estimated tariff rates have declined

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.

Tariff announcements, retaliations and delays have created a fluid environment (to say the least), impacting the chart above multiple times. In such markets, we think it’s prudent to remain humble and acknowledge that the tariff rate can remain fluid, influenced by unpredictable factors such as policy shifts, potential exclusions or deals, or substitution effects. No one can exactly predict the final rate. Nonetheless, we provide three tariff scenarios below and how we expect markets to perform in each.

Scenario 1 (our highest-conviction case): We assume some deals are struck between the United States and its trading partners, and substitution effects dampen some statutory tariff rates. We think the effective tariff rate ultimately lands in the range of ~10%–20%. Note that we started the year at a ~2% effective tariff rate, so this still represents a meaningful increase in import duties, but lands within Wall Street estimates pre–“Liberation Day.”

This scenario would still likely result in a meaningful hit to U.S. growth, higher unemployment and inflation. However, we believe the U.S. economy would avoid a recession, albeit narrowly. Market volatility would likely continue, and tariffs would hurt earnings. Monetizing volatility here can benefit portfolios.

To accomplish this, investors who qualify could consider structured notes and hedge funds in diversified portfolios. Structures can provide defensive equity exposure with a focus on delivering income through options premiums—these strategies effectively monetize volatility to provide income while sacrificing a portion of the upside.

Additionally, elevated volatility (and the dispersion that follows) generally creates potential opportunities for hedge funds to actively exploit market mispricings and relative value plays across asset classes. Hedge funds aim to provide low correlation and beta to equities and fixed income. As an instrument, hedge funds aim to offer diversification, reduce drawdowns during market stress and enhance risk-adjusted returns.

Scenario 2: Full tariff implementation and partial retaliation from trade partners. In our view, this is the worst-case scenario for markets. If the April 9 reciprocal tariffs are durable and fully implemented, we expect the U.S. effective tariff rate to exceed 20%.

In this scenario, the increase in tariffs could result in higher prices, reduced consumer spending, stifled business confidence, delayed investments, economic demand destruction, job losses, and ultimately a U.S. and global recession. Investors would be best positioned defensively.

We’d expect both the Federal Reserve and the European Central Bank to cut rates meaningfully, bond yields to fall, global stocks to tumble by double digits and the U.S. dollar to continue to weaken. In this scenario, allocations to fixed income and gold can benefit investor portfolios. Core bonds can offer stability and income, providing a safe haven for investors seeking to preserve capital amid market uncertainty. Particularly for U.S. investors, municipal bonds trading at favorable valuations relative to history can add tax-advantaged income.

Current municipal bond ratios are favorable relative to history

Municipal bond yield to Treasury yield ratio, %

Source: Bloomberg Finance L.P. Data as of April 16, 2025.

Municipals are especially timely, as it’s been reported the White House is floating a proposal within the House GOP to raise the tax rate for people making more than $1 million to 40% to offset the cost of eliminating tax on tips and Social Security. An increase in the top tax rate would be a tailwind for municipal bond demand.

Additionally, gold has returned +27% year-to-date amid volatility. The metal has proven its worth as a geopolitical hedge, and as central banks continue to diversify reserve holdings away from U.S. Treasuries, it could have room to rise further.

Scenario 3: A positive resolution with tariffs delayed or not as economically onerous as feared, allowing the administration to regain market confidence. In this scenario, we expect the U.S. effective tariff rate to fall to <10%.

We think this scenario is least likely but most positive for risk assets. It has the most potential upside for global stocks, with returns potentially exceeding 20%. Central banks may still cut rates a few times, while bond yields remain range-bound, and the dollar reverses some recent losses. Risk assets that suffered most during the tariff trade are likely beneficiaries (mega-cap tech, small caps and energy).

U.S. equities, USD, and oil lagging

Asset performance, %

Source: Bloomberg Finance L.P. Data as of April 16, 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; Consumer staples: S&P 500 Cons staples IDX; Utilities: S&P 500 Utilities index; Healthcare: S&P 500 Health Care IDX; Real estate: S&P 500 Real Estate IDX; Financials: S&P 500 Financials index; Materials: S&P 500 Materials index; Industrials: S&P 500 Industrials IDX; Energy: S&P 500 Energy INDEX; Communication services: S&P 500 Comm svc; Info tech: S&P 500 Info tech index; Consumer discretionary: S&P 500 Cons discret IDX

This chart has two tables, one showing the performance of specific assets categorized into asset classes (commodities, currencies, equities, and fixed income), and the second showing the performance of the different S&P 500 sectors. Both tables show the year-to-date returns, current drawdowns from year-to-date highs, maximum year-to-date drawdowns, and the dates of maximum drawdowns. Gold (commodities) has experienced a year-to-date return of 27.4%, with a current drawdown from year-to-date highs of positive 3.3%, reaching a maximum year-to-date drawdown of -4.8% on April 8, 2025. China Offshore Equities (equities) have achieved a year-to-date return of 5.0%, with a current drawdown of -15.0% from their year-to-date highs, and a maximum drawdown of -20.0% on April 7, 2025. U.S. Aggregate Bonds (fixed income) show a year-to-date return of 1.9%, with a current drawdown of -1.7% from year-to-date highs, and a maximum drawdown of -2.5% on April 11, 2025. European Equities (equities) have a year-to-date return of 1.4%, with a current drawdown of -10.4% from year-to-date highs, and a maximum drawdown of -16.6% on April 9, 2025. The S&P 500 Equal-Weight index (equities) has a year-to-date return of -6.6%, with a current drawdown of -10.3% from year-to-date highs, and a maximum drawdown of -16.2% on April 8, 2025. The USD (currencies) has a year-to-date return of -8.5%, with a current drawdown of -9.7% from year-to-date highs, and a maximum drawdown of -9.7% on April 16, 2025. The S&P 500 index (equities) has a year-to-date return of -10.3%, with a current drawdown of -14.1% from year-to-date highs, and a maximum drawdown of -18.9% on April 8, 2025. Brent Crude (commodities) has a year-to-date return of -11.6%, with a current drawdown of -19.6% from year-to-date highs, and a maximum drawdown of -23.4% on April 8, 2025. The Nasdaq 100 (equities) has a year-to-date return of -13.1%, with a current drawdown of -17.7% from year-to-date highs, and a maximum drawdown of -22.9% on April 8, 2025. Small Caps (equities) have a year-to-date return of -17.2%, with a current drawdown of -20.1% from year-to-date highs, and a maximum drawdown of -24.5% on April 8, 2025. The Magnificent-7 (equities) has a year-to-date return of -21.5%, with a current drawdown of -24.4% from year-to-date highs, and a maximum drawdown of -28.5% on April 8, 2025. In the S&P 500 sectors, Consumer Staples have a year-to-date return of 3.5%, with a current drawdown of -4.4% from year-to-date highs, and a maximum drawdown of -9.4% on April 8, 2025. Utilities have a year-to-date return of 1.6%, with a current drawdown of -3.9% from year-to-date highs, and a maximum drawdown of -8.8% on April 8, 2025. Healthcare has a year-to-date return of -1.0%, with a current drawdown of -8.8% from year-to-date highs, and a maximum drawdown of -10.9% on April 8, 2025. Real Estate has a year-to-date return of -2.4%, with a current drawdown of -8.6% from year-to-date highs, and a maximum drawdown of -14.7% on April 8, 2025. Financials have a year-to-date return of -3.8%, with a current drawdown of -10.7% from year-to-date highs, and a maximum drawdown of -15.7% on April 8, 2025. Materials have a year-to-date return of -4.1%, with a current drawdown of -11.3% from year-to-date highs, and a maximum drawdown of -18.0% on April 8, 2025. Industrials have a year-to-date return of -5.5%, with a current drawdown of -12.1% from year-to-date highs, and a maximum drawdown of -17.8% on April 8, 2025. Energy has a year-to-date return of -6.6%, with a current drawdown of -15.1% from year-to-date highs, and a maximum drawdown of -18.4% on April 8, 2025. Communication Services have a year-to-date return of -11.6%, with a current drawdown of -20.0% from year-to-date highs, and a maximum drawdown of -22.8% on April 8, 2025. Info Tech has a year-to-date return of -17.8%, with a current drawdown of -20.1% from year-to-date highs, and a maximum drawdown of -26.3% on April 8, 2025. Consumer Discretionary has a year-to-date return of -20.0%, with a current drawdown of -23.4% from year-to-date highs, and a maximum drawdown of -26.4% on April 8, 2025.

The situation remains fluid, and any of these scenarios could come to fruition. As such, our investment advice emphasizes strategies to help investors manage volatility and diversify portfolios. This includes expanding global asset and currency exposure, and incorporating uncorrelated assets such as gold and hedge funds for eligible investors. In a significant market downturn, core fixed income can offer resilience to multi-asset portfolios. For investors who qualify, 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.

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All market and economic data as of April 2025 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

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Where will tariff rates settle? Three scenarios explained

Estimated tariff rates have declined

U.S. effective tariff rate, %

Current municipal bond ratios are favorable relative to history

Municipal bond yield to Treasury yield ratio, %

U.S. equities, USD, and oil lagging

Asset performance, %

RISK CONSIDERATIONS

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Where will tariff rates settle? Three scenarios explained

Estimated tariff rates have declined

U.S. effective tariff rate, %

Current municipal bond ratios are favorable relative to history

Municipal bond yield to Treasury yield ratio, %

U.S. equities, USD, and oil lagging

Asset performance, %

RISK CONSIDERATIONS

Important Information

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In this article

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Experience the full possibility of your wealth

What you need to know about the trade war rollercoaster

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