We do not expect sustained blanket universal tariffs, but highly aggressive US tariffs would almost certainly trigger retaliation by US trading partners and there are risks of a tit-for-tat ratcheting up of measures. More volatile markets require an increased focus on portfolio diversification and hedging approaches.
Investment view
We continue to expect the S&P 500 to rise by year-end. If tariffs on Mexico and Canada are not sustained, we believe US economic growth will continue to support equity markets and that AI will remain a powerful tailwind. Investors should focus on portfolio diversification and consider hedging tools.
The US dollar fell to a two-month low as no immediate levies were imposed following President Donald Trump’s directive on reciprocal tariffs. Part of the losses also came from a strengthening euro, which was supported by Trump’s efforts to start negotiations about an end to the war in Ukraine that is approaching its fourth year.
President Donald Trump said he will announce 25% tariffs on all imports of steel and aluminum, without specifying when the duties would take effect. He also said he would announce reciprocal tariffs later in the week on countries that tax US imports.
Significant tariffs on imports from Canada, Mexico, and China are set to be effective 4 February. Duties levied on Canadian “energy resources” will face a lower 10% tariff, although Mexican energy imports will face the full 25%. In response, Canada's government has announced a 25% tariff on some US imports, Mexico has ordered retaliatory measures, and China's foreign minister has vowed to take “necessary countermeasures.”
Did you know?
Mexico and Canada together account for about 30% of the US’s total trade, more than twice the share of direct trade with China (12%).
US Treasury Secretary Scott Bessent is reportedly proposing a gradualist approach on universal tariffs, starting at 2.5%, with a monthly step-up of 2.5 percentage points until they reach as high as 20%.
Beijing’s potential stimulus in response to tariffs could help mitigate the impact, while US imports from markets like Taiwan and South Korea are not easily replaceable. In addition, most US sales by European companies are from goods and services made in the US.