Have Markets Moved Beyond Peak Tariff Uncertainty?

Yes, the period of greatest tariff uncertainty for global equity investors is likely behind us. Markets have gained increased clarity on the likely range of US tariff rates, and the most severe trade scenarios that were a real concern a few months ago now appear less probable. While tariffs will continue to contribute to equity market volatility—including possibly tomorrow, when higher reciprocal tariff rates are due to go into effect for most countries—their impact is now better understood than in April. We expect this tariff-shaped environment to put downward pressure on the dollar and support global ex US equity outperformance.

The question comes as US equities have surged since reaching a low on April 8, shortly after President Trump announced reciprocal tariffs on “Liberation Day.” Through yesterday’s close, US equities have returned approximately 30%, slightly outpacing global ex US equities in US dollar terms over the same nearly four-month period. The rally was initially fueled by a significant easing of US-China trade tensions, which, while still unresolved, appear to be moving toward a potential deal. Momentum continued as markets grew more confident that President Trump would moderate his approach if equity prices were to fall sharply and as fears of retaliatory tariff announcements abated.

A series of preliminary trade agreements has also given investors greater clarity on the range of potential tariff outcomes. These include agreements between the United States and Indonesia, Japan, the Philippines, South Korea, Vietnam, the United Kingdom, and the EU—its largest trading partner. While details on these agreements remain limited and the parties involved do not always interpret them the same way, the Yale Budget Lab estimates that US consumers now face an average effective tariff rate of 18.4%, the highest since 1933. This has cemented expectations that deals involving tariff rates below 10% are unrealistic, while rates at or above 30% are reserved for outliers.

Economic and corporate earnings data have also held up better than many expected. Perhaps the clearest indication of this resilience is that analysts now estimate global GDP will grow by 2.75% in 2025—just 25 basis points below forecasts made at the start of the year, according to Bloomberg. This underscores the vast size of the global economy, which at $111 trillion in 2024, overshadows the effect of increasing average tariffs from under 3% to over 18% on $3 trillion of US goods imports. This backdrop has supported corporate earnings, with S&P 500 companies expected to post 7.4% growth in second quarter. While not exceptional for these companies, this is an improvement from the 4.9% growth analysts forecast just a month ago.

Our view that we have moved beyond peak tariff uncertainty does not mean tariffs will be inconsequential in the coming quarters. Tariffs will likely exert some downward pressure on global economic growth, particularly in the United States, where all trading relationships are impacted, unlike other countries that typically see only one affected. This was evident in Wednesday’s US GDP report, which highlighted softness in real final sales to private domestic purchasers. In addition, President Trump could again unsettle markets with his tendency toward brinksmanship, especially since agreements with major trading partners such as Canada, China, and Mexico remain unresolved. Nevertheless, these dynamics are at least partially reflected in market expectations.

Although markets have already priced in some of these risks, we believe there is room for further adjustment as trade realities materialize. In this tariff-shaped environment, we expect US growth to moderate, as many countries outside the United States stand to benefit from increased fiscal and monetary support. Marginal demand for the dollar is also likely to weaken as tariffs dampen imports. These dynamics may be amplified by the one-sided nature of recent trade agreements, which risk further eroding the already diminished international perceptions of the United States among high-income countries, according to Pew Research Center. Collectively, we expect these and other forces to weaken the dollar from its historically elevated levels.

A weaker dollar would likely support the performance of global ex US equities. We also expect this bloc to benefit from a narrowing valuation gap between it and US equities, the latter of which continue to trade at historically high multiples relative to their global peers. That said, prudent risk management remains our guiding principle. While we recommend that most investors overweight global ex US equities—funded from US equities—position sizes should remain modest to help maintain diversification across multiple sources of value add.