Tariffs, trade and uncertainty: A perspective on US equity markets

These past days have been challenging. Markets have been volatile as investors digest the size and scope of US President Donald Trump’s new tariffs, which substantially exceeded most base-case expectations. Volatility is likely to continue as businesses absorb both the immediate and longer-term implications of this massive attempt to reorganize the global trade landscape.

While markets’ response to the tariffs has been swift, it is important to acknowledge that there are still many unknowns. Whether and what tariffs could be reduced or negotiated remain to be defined. We need to see responses from global trading partners. This is not the end of near-term uncertainty, but likely the beginning. We expect the market to remain volatile over the next many weeks as information unfolds. For longer-term, patient investors, there are reasons for optimism. No matter what comes, innovators will find new ways to create value in a changing world.  Valuations have also come down. We are finding companies on sale today that we consider to be high-quality, tariff- and recession-resilient, with excellent long-term prospects.

So where do we go from here?

In the near term, as producers recalibrate their business models to adjust to tariffs and consider the daunting task of moving manufacturing, we will likely see lower productivity and greater pressure on corporate margins. Global growth may slow, and we think inflation will undoubtedly tick higher. The US economy will likely be weakened in the near term by these actions. That said, a full-blown recession is also not a given. Employment and consumer spending, the bedrock of the US economy, appear to be holding up. Of course, consumer and business confidence are now also under pressure.

We think it is important to view these initiatives from a longer-term perspective. The administration's ambitious economic agenda aims to significantly reduce the deficit through lower federal spending, new sources of revenue, such as tariffs, and rebuilding the US industrial base. The administration’s commitment to reshoring manufacturing is about American jobs but also serves to address national security concerns around dependance on China and other nations for pharmaceuticals, industrial components, other critical imports, and innovation itself. We must also acknowledge that rebuilding our industrial base will be complex; it will take many years—not quarters. As such, we think that business leaders must believe that the tariffs are real and permanent for them to even consider returning a substantial manufacturing footprint to the United States.  Only time will tell, but we are inclined to take President Trump at his word. 

If Trump remains committed to this path, the road ahead will be winding and volatile.

While much remains unknown, there are some fundamental principles I believe will continue to hold.

1. There is value in active investing, especially in markets such as these.  We are looking for opportunities.
2. Quality matters. Our bias to high quality businesses with strong leaders and competitive strength is critical—these are the companies that can emerge as leaders.  Businesses we view as quality, tariff- and recession-resistant, with excellent long-term prospects, are now available at compelling valuations.
3. Lean into the long term.  While the tariff news may shift the immediate landscape, some important things have not changed. We believe that longer-term secular themes of artificial intelligence (AI) and digital transformation will continue to unfold and create value for patient, long-term investors. For those willing to look further to the horizon, there are still reasons for optimism.

A new era of domestic manufacturing will almost certainly be fueled by AI-driven automation and advanced robotics, increasing efficiency and reimagining American production. Even in the face of considerable uncertainty, we stand firm in our conviction that continuous innovation is the most durable pathway to unlocking value and sustaining growth over the long term.  Innovation is always the path through change.