Signs of economic slowdown were evident before April’s “Liberation Day” announcement. Bloomberg forecasts U.S. economic growth to slow to 1.4% y/y in 2025 (from 2.8% in 2024), while inflation may accelerate to 3.2% (from 3.0%). These are classic stagflation indicators that should guide portfolio strategy. We cannot rule out that both forecasts are too low.
According to The Budget Lab, the administration’s trade policy as of May 12, including lower tariff rates with China, the deal with the U.K., recently announced auto tariff rebates, and assuming consumption shifts, is expected to:
- Establish an overall average effective tariff rate of 16.4%, the highest since 1937
- Generate tax revenue of $270 billion annually over ten years, or 4.0% of annual federal spending ($6.8 trillion)
- Be the equivalent of an average tax of $2,300 per U.S. household
- Reduce 2025 real U.S. GDP growth by 0.7% to around 2.0% y/y
- Increase 2025 inflation by 1.7% to CPI of approximately 4.0% y/y
Investors hope the U.K. and China trade deals are the beginning of the end of the tariff story. While this could be the case, the upside for stocks and credit appears limited given elevated valuations. Much of the good news may already be baked in at current valuations.
Under a 6.0% nominal GDP scenario (2% real GDP plus 4% inflation), the risk of further downward revisions to EPS forecasts is limited. RiskBridge assumes S&P 500 earnings of $255/share (+4.9% y/y). By comparison, the average earnings forecast by Wall Street analysts remains unrealistically high for 2025 at $265/share (+9.0% y/y) and for 2026 at $297/share (+12% y/y).
The S&P 500 has returned 3.2% since “Liberation Day” as of yesterday’s close (May 12). This masks a 12% market decline in April and positions the market 5% below February’s all-time high. While RiskBridge portfolios captured some of the V-shaped rebound since April 8, we remain somewhat cautious on U.S. stocks due to technicals and valuations.
We think we are in a deceptively calm, short-lived reprieve that will last until the trifecta of the Treasury’s “X-date,” the debt ceiling debate, and tax legislation converge in July and August. After that, we hope ill-conceived trade policies will be supplanted by more constructive deregulation and debt reduction measures.
Risk diversification remains effective for fully invested portfolios. Quality investments have outperformed during recent volatility, while high-quality bonds provide relatively stable income. To manage portfolio risk dynamically, we are allocating to diversifying asset types such as TIPS, infrastructure, and other private market investments with minimal correlation to public markets.
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All data sourced from Bloomberg unless otherwise referenced.
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