The Trump administration’s tariff policies have emerged as a central concern for investors and economic forecasters in 2025. During a recent HBKS Wealth Advisors webinar, Chief Investment Officer Brian Sommers provided an in-depth analysis of how these tariffs are shaping market volatility and economic expectations.
Current Tariff Landscape
President Trump’s tariff announcements have already triggered significant market reactions, even before full implementation. The April 2nd tariff announcement caused the S&P 500 to fall approximately 12%, followed by a nearly 10% rebound after the April 9th announcement of a 90-day tariff delay.
This volatility reflects the market’s sensitivity to trade policy shifts, with investors rapidly adjusting their expectations based on evolving tariff rhetoric.
According to the International Monetary Fund (IMF), “US tariffs now exceed the highs that were reached during the Great Depression.” This historical comparison underscores the unprecedented nature of the current trade policy approach and helps explain why markets are responding so dramatically.
How Companies Are Responding to Tariff Threats
Businesses face multiple options for dealing with tariff-related cost increases. Sommers presented data showing how companies are planning to navigate these challenges:
- Passing costs to consumers: The most common approach companies are taking is to pass a portion of the tariff costs along to customers through price increases
- Finding new suppliers: Some businesses are searching for alternative supply chains outside of targeted countries
- Accelerating purchases: As evidenced by the first quarter import surge, many companies have moved purchases forward to avoid anticipated tariffs
- Absorbing costs internally: Some businesses are planning to accept reduced profit margins rather than raise prices
- Scaling down operations: In more extreme cases, companies may reduce production or postpone expansion plans
The predominance of the first strategy—passing costs to consumers—is particularly concerning for inflation prospects. As Sommers noted, “The International Monetary Fund or the IMF recently raised its forecast for inflation in the United States a full 1% for this year, largely because of the expected impact of tariffs.”
Global Economic Impact
While most discussions of tariffs focus on domestic consequences, the IMF forecasts significant global implications. In its quarterly report on the global economy, the IMF lowered its forecast for global growth by approximately half a percentage point for both this year and next year as a direct result of tariff policies.
Interestingly, the IMF expects the trade war to have a more pronounced negative impact on growth in the United States compared to most other countries, including China. This differential impact helps explain the divergence in stock market performance between the U.S. and foreign markets in 2025.
Foreign markets have outperformed U.S. equities so far this year:
- Foreign developed markets (represented by the EFA index) are up over 14%
- Emerging market stocks have risen about 8%
- The ACWI ex-US Index (representing 85% of global equity markets outside the U.S.) is up over 11%
- Meanwhile, the S&P 500 is down around 4%
Sommers explained this divergence: “In the United States, President Trump’s tariff policies are being viewed as hindering economic growth, both in the U.S. and overseas. And there tends to be more growth policies in countries outside the U.S. as other countries are enacting policies in order to try and offset the expected drag to growth that will come with the tariff war.”
Policy Responses Around the World
Foreign central banks and governments are implementing proactive measures to counteract potential tariff impacts:
- The European Central Bank (ECB) has cut interest rates multiple times in 2025, bringing borrowing costs to their lowest level since late 2022
- The ECB has signaled its willingness to implement additional policy easing if necessary
- Expectations for increased defense spending in Europe have boosted the region’s industrial sector, particularly aerospace and defense stocks
- Many countries are developing targeted economic stimulus measures to offset trade-related growth drags
These accommodative policies outside the U.S. are contributing to the relative strength of foreign markets, creating potential opportunities for internationally diversified investors.
Potential Inflation Consequences
Perhaps the most immediate concern surrounding tariffs is their potential inflationary impact. Inflation, which had been trending downward since its 2022 peak, appears to have stalled around 2.5%—still above the Federal Reserve’s 2% target.
Tariffs typically function as a tax on imports, raising prices for both intermediate goods used in manufacturing and finished consumer products. When businesses pass these increased costs to consumers, it creates upward pressure on inflation throughout the economy.
The IMF’s decision to raise its U.S. inflation forecast by a full percentage point signals significant concern about this inflationary potential. This revised forecast complicates the Federal Reserve’s policy calculations, potentially delaying interest rate cuts even if economic growth begins to falter.
The Negotiation Perspective
Despite the dramatic market reactions to tariff announcements, Sommers suggested that the final implementation may be less severe than initially proposed. He noted several factors that could moderate the ultimate tariff impact:
- Market feedback mechanism: “President Trump has shown that he will listen to what the market is telling him,” Sommers observed, pointing to the 90-day tariff delay announced after the market’s negative reaction to the initial announcement
- Political pressure: There is “constant pressure on the President to prevent an economic downturn from voters, businesses, the markets, as well as other Republicans”
- Wall Street influence: The rising influence of Scott Bessent, a Wall Street veteran, within the White House may provide a moderating voice on trade policy
- Negotiation strategy: The threat of high tariffs may be part of a negotiation strategy rather than a fixed policy position
“Even if the tariffs are negotiated down, they will be unlikely to drive consumption down because they won’t be large enough in order to have a severe impact on consumers,” Sommers suggested as a potential optimistic outcome.
Investment Implications
For investors, the tariff situation creates both challenges and opportunities:
- Diversification value: The outperformance of foreign markets during tariff-related U.S. market volatility demonstrates the value of international diversification
- Sector impacts: Certain sectors may be more vulnerable to tariff effects than others, potentially warranting tactical adjustments
- Fixed income consideration: The potential for slower growth due to tariffs could benefit high-quality bonds, especially if the Federal Reserve delays rate cuts due to inflation concerns
- Volatility planning: Preparing for continued tariff-related volatility through appropriate risk management and liquidity planning
Sommers emphasized that despite these considerations, dramatic portfolio changes are likely unnecessary for most investors with well-diversified, strategically allocated portfolios. The value of diversification has been demonstrated by the recent outperformance of foreign investments and fixed income during periods of U.S. equity weakness.
Conclusion
While tariffs represent a significant source of market uncertainty and economic risk, the actual impact may prove less severe than worst-case scenarios suggest. The ability to negotiate tariff levels down, combined with adaptive monetary and fiscal policies, could moderate the ultimate economic consequences.
Nevertheless, investors should remain vigilant about inflation risks and potential growth impacts while maintaining appropriately diversified portfolios that can weather continued policy uncertainty.
This article is based on a May 2025 webinar presented by Brian Sommers, CIO of HBKS Wealth Advisors. While the information presented is believed to be accurate, individual financial circumstances vary, and readers are encouraged to consult with their financial advisor before making investment decisions.
