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Podcast: (25:00)
Podcast: Investors' club: The CIO view on Trump tariffs from our US and China analysts (13:56)
Video: CIO Mark Haefele on investing through heightened political uncertainty (3:40)

What happened?

Global equities extended their losses and volatility picked over the past 24 hours as uncertainty over the shape and economic impact of President Donald Trump’s tariff plans overshadowed his eventual decision to pause most of his 25% tariffs on Canada and Mexico. The latest reprieve for Canada and Mexico applies until 2 April to goods covered by the North American trade agreement known as the USMCA.

The S&P 500 and Nasdaq indices fell 1.8% and 2.6% on Thursday, respectively, with the latter formally entering a correction. Chipmakers came under particular pressure, with Marvell Technology plunging nearly 20% after it reported strong earnings but mixed guidance. Stocks like ON Semiconductor, Taiwan Semiconductor, and NVIDIA also declined.

Asia's equity markets fell on Friday, with the Nikkei 225 down 2.2% amid yen strength, and the Hang Seng index down 0.6%. At the time of writing, the 10-year US Treasury yield is hovering around 4.25%. Gold is trading just 1% from the all-time high hit in late February at USD 2,928/oz, while the US dollar index (DXY) has fallen to its lowest level since early November. On Friday, S&P 500 futures were up 0.4%, pointing to only a modest rebound.

Equity volatility has picked up on the “will-he-won't-he” tariff headlines, with the VIX volatility index rising another three points to 25 on Thursday, its highest level since mid-December. Recent economic data have raised concern among investors that Trump’s policies may be hindering the economy. The Fed’s Beige Book pointed to weaker growth and persistent inflation pressures in key sectors, while earlier this week the ISM manufacturing index signaled a slowdown in business activity, with rising input costs tied to tariffs.

What do we think?

Stock weakness and stability in bonds points to tariff-driven fears. Thursday’s trading pattern, with stocks falling sharply, but with no offsetting gains for bonds, suggests that investors’ main concern is that tariffs could both push inflation higher and weigh on growth. If the sell-off were solely about weaker growth, bond yields would likely fall along with stocks. Based on futures markets, investors expect the Federal Reserve to deliver 73bps of rate cuts by the end of the year—similar to Wednesday’s pricing.

Tariff fears are weighing on business sentiment, even in Trump territory. Texas has long been a political stronghold for President Trump. However, the latest Dallas Fed Beige Book highlighted growing uncertainty among businesses, in manufacturing and services, with firms citing concerns over trade policy and rising input costs tied to tariffs. This shift in sentiment suggests that even in historically Trump-aligned regions, policy uncertainty could weigh on investment and hiring, potentially dragging on broader economic growth.

Adding to concerns, this week’s ISM manufacturing index and recent PMI data pointed to rising input costs tied to tariffs, reinforcing concerns over trade-related inflation pressures.

Relative stock market performance suggests that Trump is losing the growth narrative to Germany's chancellor-in-waiting, Friedrich Merz. US equities rallied in the wake of President Trump’s election on expectations that his policy agenda would be pro-growth. The market’s reaction to his latest tariff moves indicates growing skepticism over his ability to maintain strong growth. Notably, the divergence in equity performance between US and European stocks both this year and this week underscores this dynamic, as investors recalibrate expectations. We believe that Germany’s fiscal expansion plans, centered around increased defense spending, have the potential to improve the investment outlook domestically and for the wider European region.

The lack of cohesion between Trump and his administration officials is compounding policy uncertainty. The disconnect between Trump’s aggressive trade stance and Commerce Secretary Howard Lutnick’s more pragmatic approach—which in turn is sometimes followed by concessions from the President—has complicated the administration's message. When signing the tariff reprieve for Canada, Trump reiterated his view that the tariffs were “something we have to do” and the interruption to tariffs would just be “short term.” This lack of cohesion is creating uncertainty in financial markets and is likely to curb investment decisions, as businesses and investors question whether Trump’s policies will ultimately support or hinder economic momentum. Influential parts of the financial press are highly critical of Trump’s policy agenda and the President's approval ratings have declined, particularly on trade, foreign policy, and inflation (although immigration approval remains high).

Taking these factors into consideration, this week we have changed the probabilities we attach to our tariff scenarios:

The willingness to impose tariffs against allies and adversaries alike illustrates the extent to which the US administration will go to achieve a range of economic and noneconomic policy goals, thus lowering the odds of ending up in a limited or benign tariff environment. We therefore have reduced the probability of achieving these upside scenarios to 15% from 25%.

Conversely, the additional 25% tariffs on Mexico and Canada fall under our highly aggressive tariff downside scenario if they are sustained. Although we do not believe these tariffs will be sustained, we have opted to increase the probability of the highly aggressive trade downside scenario to 35% from 25%. In our view, the risk that these tariffs will remain in place long enough to weigh on economic activity has increased.

The situation remains highly fluid, but our base case remains at 50%, anticipating aggressive but selective tariffs that heighten market volatility without derailing the economy.

How do we invest?

Our core message remains to stay invested in stocks, with a focus on the US, AI, and power and resources, but also hedging those equity exposures to manage near-term risks. With a 2 April deadline for further tariffs and a looming debt ceiling debate, uncertainty is set to remain high. Investors should also ensure portfolios are well diversified with assets such as quality bonds, gold, and alternatives.

Specifically, our key investment ideas include:

Navigate political risks. Tariff-related uncertainty and trade policy shifts reinforce the need for portfolio diversification and risk management. In equities, capital preservation strategies can help manage downside risks. We continue to favor high-quality fixed income like investment grade corporate bonds, which may provide a hedge against trade risks. Additionally, long USDCNY positions could serve as a trade hedge, while CAD and MXN exposure should be hedged or avoided in the near term. We believe gold remains an effective hedge against geopolitical and inflation risks, while certain hedge fund strategies can provide portfolio resilience.

More to go in stocks. While trade policy and AI concerns have pressured US equities, strong demand for AI compute and ongoing investment in infrastructure should support long-term growth. AI-driven capex trends reinforce our confidence in AI as a structural growth driver despite near-term volatility. Earnings growth and AI investments should continue to support stocks, and we still expect the S&P 500 to reach 6,600 by year-end.

We continue to recommend gaining exposure to the DAX through structured strategies or, more selectively, via our “Six Ways to Invest in Europe” theme. Alternatively, we still see the EMU industrial sector and EMU small-caps and mid-caps as Attractive.