Tariffs, policy uncertainty weighs on economic, investing outlooks

Chief Investment Officer Larry Adam notes with volatility on the rise, maintaining a long-term view is key.

Key takeaways

• While the effective trade-weighted tariff should settle below the 22.5% forecasted level, the final rate is likely to stay well above our original 10% estimate.
• Tariffs pose a greater challenge to the US economy going forward, and as a result, we have reduced our 2025 GDP forecast from 2.4% to ~1.0%.
• Earnings forecasts have also been revised downward due to tariffs, and the year-end S&P 500 target has moved from 6,375 to 5,800.

As tariffs and policy uncertainty continue to dominate headlines and impact global markets, how are US economic and market outlooks being affected by the developments? Raymond James Chief Investment Officer Larry Adam takes a look and provides insight into his team's outlooks in his quarterly update.

The economy forms the foundation of our investment decision-making, and despite a few near-term headwinds, the US economy remains on solid footing, and we do not see any signs of a recession developing.

However, with the Trump administration implementing fresh ground rules, there has been a significant uptick in uncertainty for both consumers and businesses. The main concern is economic policy uncertainty, especially regarding tariffs. The more aggressive tariff rollout will have a bigger negative impact on economic growth and inflation than we were originally anticipating. While the effective trade-weighted tariff should settle below the current 22.5% forecasted level (up from 2.5% at the beginning of the year), as negotiations gain steam, the final rate is likely to stay well above our original 10% estimate. However, avoiding the expiration of tax cuts and benefiting from deregulation later this year should help support growth.

While the one-time impacts of a harsh flu season, cold winter, and accelerated company imports to avoid tariffs weighed on first quarter growth, the significant increase in tariffs poses a greater challenge to the economy going forward. As a result, we have reduced our 2025 GDP forecast from 2.4% to ~1.0% as the downside risks to the economy increase, but a recession should be narrowly avoided. Healthy job growth, still solid consumer spending, continued AI investment, and a Federal Reserve poised to cut interest rates three times this year should keep the economic expansion going. These insights from our economists guide our decision-making as we maintain constructive, positive views on most asset classes.

The recent decline in the US equity market has made valuations more reasonable, and we have confidence in their ability to grow earnings, especially with the addition of emerging stars from the artificial intelligence (AI) sector. We view the recent Tech sector weakness as a temporary setback, not reflective of the sector’s strong fundamentals. However, the significant increase in tariffs will reduce growth and be a bigger drag on corporate margins. These downgrades have led us to lower our S&P 500 corporate earnings estimate to $250-$255 (from $270), which still represents positive earnings growth of 4-6% in 2025. With our lower earnings forecast, we have reduced our year-end S&P 500 target to 5,800 (from 6,375) and recommend using any periods of weakness as buying opportunities. If our target is achieved, the equity market will have rallied strongly between now and the end of the year. Historically, the equity market has provided the best long-term performance among the major asset classes for building wealth.

From a market-cap perspective, we continue to prefer mid-cap stocks over small caps, as they need more time for the economy to develop further and for short-term interest rates to fall.

We’re resisting the temptation to switch our preference from the US equity market to international equities, although some tout European equities as the next great market to rebound. However, our analytics suggest that the fundamentals remain in favor of US equities, with greater earnings growth, profitability, less exposure to tariffs, and more dominant companies in the sectors we prefer, especially Technology. Additionally, the US has a better educational infrastructure, greater entrepreneurship, and significantly lower taxes compared to Europe. These dynamics should keep investment money flowing to the US and help maintain its premium valuations.

After years of record-low interest rates, with the 10-year Treasury yield briefly trading below 1%, the recent uptick in interest rates across the maturity spectrum has increased the income bonds can generate. Additionally, bonds have served as a diversifier and risk mitigator during the recent volatility in the equity markets, just as they have done consistently through time. The big question is whether the anticipated lifting of the debt ceiling this summer will cause a surge in government issuance that sends interest rates dramatically higher. We do not think so, as demand for government bonds remains healthy among retail investors, foreigners, and pension funds. With the downward revisions to our economic outlook, we have modestly reduced our year-end 10-year Treasury yield forecast to 4.25% (from 4.50%).

There are no guarantees in the near-term performance of any asset class, and that's why a long-term perspective is crucial, allowing your portfolio to mesh. Short-term, panic-driven decisions rarely help your overall goal. With volatility on the rise, maintaining the right asset allocation, a diversified portfolio, and a long-term horizon is key. Successful investing requires strategy, patience, and resilience. A strong investment portfolio grows through disciplined decisions and a long-term vision. Remember, while you're the owner of your portfolio, let your advisor use their expertise to help you construct it.

Be patient and focused on the long term.

Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of the Raymond James Chief Investment Officer and are subject to change. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. Economic and market conditions are subject to change. Diversification does not guarantee a profit nor protect against loss. The S&P 500 is an unmanaged index of 500 widely held stocks. An investment cannot be made in this index. The performance mentioned does not include fees and charges, which would reduce an investor’s returns. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in small-cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The prices of small company stocks may be subject to more volatility than those of large company stocks.