Here’s what we know so far about Trump’s tariffs and the possible long-term implications for investing in a world that is once again stepping into the unknown:   

US tariff rise is enormous 

Calculating the precise US average weighted-tariff rate on the rest of the world is like trying to hit a moving target. 

However, at the time of writing (on April 14), the average US tariff is perhaps 23%, while on China specifically it is above 100%. This is up from 3% at the start of Trump’s second term on January 20. 

These are levels last reached in the early 1900s, and higher than the Smoot-Hawley trade levies of 1930 that worsened the Great Depression. 

Base case scenario

For the purposes of conditioning our baseline economic forecasts, a medium-term ‘steady state’ scenario could involve: 

The average weighted US tariff would be about 18% in this scenario.

A framework for thinking about this tariff configuration is that the baseline levy is Trump’s revenue generator for tax cuts, the China tariffs are part of long-term economic decoupling and the sector tariffs are about protecting strategically-important industries. 

Other possible scenarios… 

The 90-day delay on the ‘reciprocal’ tariffs could be just that – a temporary reprieve after which these levies are fully reinstated. 

US-China tit-for-tat retaliation could continue. Their bilateral trade war could expand to include China banning the export of critical mineral to the US, or even selling its US Treasury bond (government bond) holdings.

A global trade war could develop if other countries impose tariffs on each other amid dumping of excess exports as overseas markets disappear.

That said, there are also upside scenarios. Trump may be so chastened by the sell-off in the US Treasury market, deteriorating consumer and business sentiment, and pressure from political donors, that he eventually pivots from tariffs towards tax cuts and deregulation.

But what are the potential implications of all this uncertainty?

US stagflation, negative-growth shock elsewhere 

Higher tariffs raise costs and lower disposable income for US consumers. Lower equity prices and higher bond yields tighten financial conditions. Uncertainty means consumers and businesses put off decisions. 

That’s why we forecast US growth averaging 1.3% in 2025, down from 2.8% in 2024. A recession is very possible. Meanwhile, we’re expecting US inflation of 3.2% this year, up from 2.9% in 2024, as higher goods prices more than offset the steep fall in oil prices and the disinflation that was underway. In other words, we’re looking at US ‘stagflation’.

Weaker growth but higher inflation creates a dilemma for the US Federal Reserve (Fed) that will probably prevent it from delivering the number of rate cuts markets are expecting. We are forecasting two cuts this year, with the fed funds rate falling to 3% by the end of 2026. However, rate cuts will be greater in frequency and size in the event a recession.

For the rest of the world, tariffs are a negative-growth shock that will also weigh on inflation –  meaning more monetary easing. We have downgraded our global growth forecasts to 2.7% in 2025 and 2026 – below the 3% trend rate the world could be growing at, but not quite a global recession.

What’s more, investors will need to question some of their long-held assumptions. This process of introspection may lead to a couple of uncomfortable conclusions. 

US less attractive as long-term investment

The decline in US stocks has been larger than elsewhere because they started from more elevated valuations. But this premium hasn’t been fully unwound, and it may have to be if investors reassess the ability of US firms to generate high returns over the long run. 

After all, tariffs lower economic growth by reducing efficiency, while the US policy environment may be inherently unpredictable under a forceful executive and a more compliant legislature and judiciary. 

The rise in US bond yields suggests markets are reassessing the haven status of US government debt. Typically, investors flock to US Treasuries in times of uncertainty. But this time things look different, given the still unlikely but serious risk that the Trump administration does something truly extreme, like firing the chair of the Fed, levying a user charge on Treasuries, or forcibly converting US debt into longer maturities. 

And as capital flows out of US assets, the value of the dollar has declined. The combination of US equities, bonds and the dollar all falling looks more like an emerging market sovereign crisis, rather than the price action of the provider of the world’s ‘safest’ assets.

In our latest House View (see Chart), we are still modestly positive corporate risk, including developed market equities, over a medium-term horizon. But this is increasingly rotating into European or Chinese assets. And we are neutral the dollar, which is unlikely to provide its typical hedge to counter global growth risks or further tariff increases.

60/40 portfolios unlikely to provide sufficient diversification 

The negative correlation between equities and bonds in the past made them good diversifiers. This relationship forms the basis of the classic 60% equity: 40% bond portfolio. But this negative correlation isn’t a law of nature.  

As we move into a world of more supply shocks from supply-chain disruptions, geopolitical shocks, and climate change, this correlation will increasingly turn positive – with both asset classes mirroring each other. 

That’s because supply shocks push growth and inflation in different directions and will drive bond and equity prices in the same direction.

We are still positive duration – including global government bonds –  because they may still protect against the downside recession scenario in which central banks will make significant cuts in interest rates. 

But we’ve also added a range of private markets into our quarterly review. Global property faces risks from the economic outlook, pricing in some parts of private credit may be stretched, and global infrastructure could be less attractive for private capital if governments build more themselves. 

However, what these private market assets may add to a portfolio is less exposure to the economic cycle and more diversification.