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.

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

Important Information

All companies referenced are shown for illustrative purposes only, and are not intended as a recommendation or endorsement by J.P. Morgan in this context.

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

The information presented is not intended to be making value judgments on the preferred outcome of any government decision.

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.

Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage

As a reminder, hedge funds (or funds of hedge funds) often engage in leveraging and other speculative investment practices that may increase the risk of investment loss. These investments can be highly illiquid, and are not required to provide periodic pricing or valuation information to investors, and may involve complex tax structures and delays in distributing important tax information. These investments are not subject to the same regulatory requirements as mutual funds; and often charge high fees. Further, any number of conflicts of interest may exist in the context of the management and/or operation of any such fund. For complete information, please refer to the applicable offering memorandum.

Investing in fixed income products is subject to certain risks, including interest rate, credit, inflation, call, prepayment and reinvestment risk. Any fixed income security sold or redeemed prior to maturity may be subject to substantial gain or loss.

Investors should understand the potential tax liabilities surrounding a municipal bond purchase. Certain municipal bonds are federally taxed if the holder is subject to alternative minimum tax. Capital gains, if any, are federally taxable. The investor should note that the income from tax-free municipal bond funds may be subject to state and local taxation and the Alternative Minimum Tax (AMT).

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.

Structured products involve derivatives and risks that may not be suitable for all investors. The most common risks include, but are not limited to, risk of adverse or unanticipated market developments, issuer credit quality risk, risk of lack of uniform standard pricing, risk of adverse events involving any underlying reference obligations, risk of high volatility, risk of illiquidity/little to no secondary market, and conflicts of interest. Before investing in a structured product, investors should review the accompanying offering document, prospectus or prospectus supplement to understand the actual terms and key risks associated with the each individual structured product. Any payments on a structured product are subject to the credit risk of the issuer and/or guarantor. Investors may lose their entire investment, i.e., incur an unlimited loss. The risks listed above are not complete. For a more comprehensive list of the risks involved with this particular product, please speak to your J.P. Morgan representative.

This material is for informational purposes only, and may inform you of certain products and services offered by private banking businesses, part of JPMorgan Chase & Co. (“JPM”). Products and services described, as well as associated fees, charges and interest rates, are subject to change in accordance with the applicable account agreements and may differ among geographic locations. Not all products and services are offered at all locations. Please read all Important Information.

General Risks & Considerations

Any views, strategies or products discussed in this material may not be appropriate for all individuals and are subject to risks. Investors may get back less than they invested, and past performance is not a reliable indicator of future results. Asset allocation/diversification does not guarantee a profit or protect against loss. Nothing in this material should be relied upon in isolation for the purpose of making an investment decision. You are urged to consider carefully whether the services, products, asset classes (e.g., equities, fixed income, alternative investments, commodities, etc.) or strategies discussed are suitable to your needs. You must also consider the objectives, risks, charges, and expenses associated with an investment service, product or strategy prior to making an investment decision. For this and more complete information, including discussion of your goals/situation, contact your J.P. Morgan team.

Non-Reliance

Certain information contained in this material is believed to be reliable; however, JPM does not represent or warrant its accuracy, reliability or completeness, or accept any liability for any loss or damage (whether direct or indirect) arising out of the use of all or any part of this material. No representation or warranty should be made with regard to any computations, graphs, tables, diagrams or commentary in this material, which are provided for illustration/ reference purposes only. The views, opinions, estimates and strategies expressed in this material constitute our judgment based on current market conditions and are subject to change without notice. JPM assumes no duty to update any information in this material in the event that such information changes. Views, opinions, estimates and strategies expressed herein may differ from those expressed by other areas of JPM, views expressed for other purposes or in other contexts, and this material should not be regarded as a research report. Any projected results and risks are based solely on hypothetical examples cited, and actual results and risks will vary depending on specific circumstances. Forward-looking statements should not be considered as guarantees or predictions of future events.

Nothing in this document shall be construed as giving rise to any duty of care owed to, or advisory relationship with, you or any third party. Nothing in this document shall be regarded as an offer, solicitation, recommendation or advice (whether financial, accounting, legal, tax or other) given by J.P. Morgan and/or its officers or employees, irrespective of whether or not such communication was given at your request. J.P. Morgan and its affiliates and employees do not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transactions.

Amid rapid policy changes, we’re refining our views on global economies and markets.

Global Investment Strategy Group

Published Apr 17, 2025

Experience the full possibility of your wealth

We can help you navigate a complex financial landscape. Reach out today to learn how.

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, %

Insights delivered, weekly

RISK CONSIDERATIONS

TAGS

Share

In this article

YOU MAY ALSO LIKE

5 thoughts on the market’s tariff tantrum

Experience the full possibility of your wealth

What you need to know about the trade war rollercoaster

Trending Insights