Investment Strategy
by Larry Adam
Chief Investment Officer, Private Client Group

The long-term outlook for tariffs remains unclear

May 30, 2025

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Key Takeaways

• While the legal process plays out, current tariffs remain in place
• The long-term outlook for tariffs remains unclear
• We are maintaining our key forecasts until visibility improves

The trade war saga entered a new phase this week. President Trump ran into his first legal roadblock as the US Court of International Trade ruled that he overstepped his authority under the International Emergency Economic Powers Act (IEEPA) by imposing country- level (‘reciprocal’) tariffs. Less than 24 hours later, an appeals court put a temporary stay on the trade court’s ruling—which means the tariffs will remain in place for now. Notably, the trade court’s decision did not apply to sector-level tariffs on steel, aluminum, and autos, which will also remain in place. With our Washington policy analyst expecting the case to eventually reach the Supreme Court, the path forward will likely see more twists and turns in the months ahead. The on-again, off-again nature of the trade policy landscape adds to the ongoing uncertainty. Here’s how it impacts our views:

Legal Ruling Is A Detour, Not The End Of Tariffs | We find it highly unlikely that this (or any other) court ruling would bring a permanent end to country-level tariffs, given that tariffs are a cornerstone of President Trump’s policy agenda. This latest development introduces yet another twist in the story. But given the still-unclear trade policy landscape, there is no immediate basis to make changes to our forecasts.

• Economy—While the trade court ruling is not the endgame for tariffs, a hypothetical end to country-level tariffs would lower the average effective tariff rate to ~6% from the 17% level we had penciled in after ‘Liberation Day’ (April 2). Again, this is hypothetical, given that the appeals court has allowed tariffs to remain in place while the case is considered. But, if country-level tariffs were to disappear, it would affect our forecasts for both growth and inflation. Using our rule of thumb that a 1% decrease in the average effective tariff rate leads to a 0.1% reduction in inflation, there would be downside to our inflation forecast of 3.5%. Similarly, a 1% decrease in the average effective tariff rate would lead to a 0.1% increase in growth—thereby creating upside to our 2025 GDP forecast of ~1%. Given our expectation that the economy will narrowly avoid a recession, lower tariffs would improve the outlook. Negotiations with many trading partners are ongoing; however, there’s also the possibility that new sector-specific tariffs—such as those on semiconductors and pharmaceuticals— could be introduced. These continual developments in the tariff landscape are keeping uncertainty elevated, which may further dampen business investment, confidence, and overall economic growth. As a result, we are maintaining our current forecasts until there is greater clarity on the final direction of tariff policy.
• Equities—The prospect of lower tariffs could serve as a positive catalyst supporting investor optimism, building upon the gains following the recent recent Moody’s downgradea few weeks ago. Reduced tariffs would not only enhance the economic outlook but also support a more favorable trajectory for full-year S&P 500 earnings. As we've previously noted, tariffs exert a dual drag on corporate profitability by slowing sales growth and compressing margins. Now that the S&P 500 has fully recovered from its ‘Liberation Day’ swoon and is sitting around 4% below its February all-time high, we believe caution is warranted. Why? First, valuations have once again reached elevated levels. Second, 10-year Treasury yields near 4.5% are approaching a threshold where equity performance historically begins to falter. Finally, beyond the volatile tariff environment, uncertainty persists around the timing and scope of the tax-and-spending bill in Congress. Given these factors, we remain comfortable with our year-end S&P 500 target of 5,800. While the index is currently near that level, we continue to see opportunities for outperformance at the sector level.
• Fixed Income—Treasury yields are likely to stay elevated as markets navigate the latest developments on the tariff front. On one hand, lower tariffs could signal a more favorable growth-inflation dynamic, potentially prompting the Fed to delay any policy moves—a view that has gained traction following the recent trade truce with China. On the other hand, a decline in tariff revenue may heighten concerns over the expanding federal budget deficit, especially as President Trump’s tax bill advances through Congress. Fiscal issues are front- and-center for investors, underscored by the recent Moody’s downgrade of US government debt. This should keep the 10-year Treasury yield in the well-defined trading range it’s been in over the last few years between 3.75% and 4.75%. The bond market’s muted reaction to the court ruling suggests that the read-through (improving growth, burgeoning deficits, and a Fed on hold) is already embedded in the elevated level of yields—a view we share. Thus, we maintain our year-end target of 4.25% for the 10-year Treasury yield.

Bottom Line | The emergence of legal headlines has added another layer of unpredictability to an already volatile trade policy landscape. With little clarity on the path ahead—and tariffs likely to remain a central feature of the Trump administration’s agenda—we are refraining from making any immediate adjustments to our economic or market forecasts. Given the persistent uncertainty and the ongoing drag from tariffs on growth and earnings, we are reaffirming our year-end targets of 4.25% for the 10-year Treasury yield and 5,800 for the S&P 500.

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