This article will try to unravel the economic fallout from US tariffs, the implications for markets, and how Schroders views key asset classes. 
 

Tariff fallout

Initially, many viewed tariff policies as mere bluster aimed at negotiating better trade deals. However, the launch of Liberation Day revealed a much harsher reality.

Economists warned that overall tariffs could reach an effective US rate of 8-12%, with concerns that rates above 10% could tip the economy into recession. But Trump’s unconventional method of calculating reciprocal tariffs, based on the trade deficit rather than equivalent tariffs, drove the effective rate to over 25%, exacerbated by retaliatory measures from China that pushed it closer to 30%.

145% on China represents the additional 91% imposed since Liberation Day on 2 April.
Source: Schroders Economics Group, 13 April 2025
 

While recent efforts have eased tensions, with the effective tariff rate now dropping to around 20%, the concern of “peak tariff fear” might be behind us. 

At time of writing, US trade agreements are advancing with India, the UK, Japan, Cambodia, Vietnam, and more than 50 others (according to the White House). The European Union adopted a restrained approach, opting for negotiations over direct retaliation, indicating a willingness to cooperate rather than escalate tensions.

However, the damage may already be done. Prolonged uncertainty increases the risk of an unnecessary US recession. Inflation and the depreciation of the US dollar are eroding consumer purchasing power, while fear that tariffs will weigh on real wage growth could be prompting consumers to reduce spending.

Schroders considers that corporations, uncertain about future trade policies, may hold back on capital expenditures (CAPEX) and hiring intentions. Some might even consider cutting jobs to protect margins affected by tariff costs, leading to overall reduced spending from both consumers and businesses. 

In Schroders' view, the combination of rising inflation and stagnating growth could see the US slipping into stagflation, a scenario where economic growth is negative but inflation is too high for the Federal Reserve to implement cuts effectively. 

Thankfully, declining oil prices offer some relief, and it appears that tax cuts are being expedited through the US Congress amidst this uncertainty.

Schroders believes that if uncertainty - the "fog of war" – continues, the risk of a self-inflicted US recession increases.
 

A healthy backdrop

Part of the reason for the market’s shock at Trump’s tariffs may have been the economic backdrop against which they were announced. Despite the chorus of growth downgrades that followed the tariff announcements, the US economy was on a sound footing at the time [but has since weakened after the US economy contracted by 0.3% in the first quarter of 2025].          

With quarterly GDP growth in the 2-3% range, driven by robust private consumption, the outlook was promising. Strength in consumption stemmed from high real wage growth and job security, both underpinned by a healthy corporate sector boasting strong margins and earnings.

Corporations were increasingly investing in capital expenditures (CAPEX) to enhance productivity, with a shift towards onshoring and small businesses confident in Trump’s supportive stance. 

The recent US job numbers reflect substantial growth in private employment, with even government jobs increasing despite cuts made by DOGE (Department of Government Efficiency). 

Recently, real wage growth in the US has surpassed expectations, retail sales have rebounded following a sluggish end to the previous year, and indicators such as redbook sales and restaurant bookings have remained strong.

However, in Schroders' view, this is now all under threat for a variety of reasons. Higher tariffs have the potential to reduce real wage growth. Business confidence in the US is collapsing. CAPEX plans are on hold and households are questioning their job security. Schroders considers that this all leads to slower growth and a potential recession the US didn’t have to have [as the latest US GDP figure showed].
 

Is US economic pre-eminence under threat?

The potential end of US exceptionalism represents a surprising shift in the global economic landscape. Historically, US assets (both equities and bonds) enjoyed artificially low risk premiums due to the allure of the reserve currency and the perception of safety. 

However, Schroders considers that recent changes in the US standing have sparked capital outflows as foreigners offload bonds and equities to raise cash to repatriate back home.

Many investors have held unhedged currency positions in bonds and equities, benefiting from both appreciating assets and a stronger dollar. With the US dollar now declining, this capital is returning to domestic shores. 

Moreover, policy uncertainty and the looming possibility of a US recession have prompted a reassessment of the elevated valuation multiples currently assigned to the S&P 500 index in the US —what if valuations decline alongside earnings?

As countries like China consider decoupling from the US market, demand for US treasuries diminishes. In Schroders' view, a recession could exacerbate the fiscal deficit, necessitating a higher risk premium for bonds. Recently, this has resulted in a simultaneous sell-off of US equities and bonds.

In contrast, other markets are gaining attention. Schroders has observed that European equities are noted for their relative affordability, supported by European Central Bank rate cuts, a high domestic savings rate, and a shift in fiscal policy, exemplified by Germany's announcement of an additional 3.5% fiscal spend relative to GDP, focusing on defence and infrastructure, as well as discussions of tax cuts.

Meanwhile, despite being the primary target of the trade war, China is also making policy changes aimed at levelling the playing field for private companies. Signs from recent meetings, including one with Jack Ma (founder of Alibaba Group), suggest a softening of the "Common Prosperity" stance, potentially allowing Chinese tech giants like Alibaba and Tencent to revalue higher, given their lower multiples compared to US counterparts. 

In Schroders’ opinion, anticipated stimulus measures from China further enhance its market appeal.
 

Key asset classes

Trump’s tariffs are being paused, reinstated, lifted and redefined on a near daily basis. Successful investing in such a fluid environment depends on identifying winners and losers – the essence of active investing. 

Here’s how Schroders views the effect of tariffs on key asset classes:
 

1. Equities

In Schroders' view, the shine may be fading from US equities, leading investors to pivot towards equities in the rest of the world (RoW). While the US retains its competitive edge in technology, evidenced by the strong earnings of the "Magnificent Seven," US stocks may demand a lower valuation multiple moving forward. 

If the US can implement more reregulation and tax cuts, Schroders considers that the US might regain some dominance, but overall multiples are likely to remain under pressure. 

Schroders predicts that if the US enters a recession, RoW stocks, while currently cheaper, may also face downward pressure, though fiscal tailwinds could eventually support a return to home-country biases.
 

2. Bonds

Active management across various countries and yield curves is essential. Recent volatility has highlighted the diversity that exists within the fixed income landscape. 

Schroders notes the opportunity to diversify away from US bonds towards more promising markets like Germany and Australia, noting the possibility of re-entering the US treasury market following the recent sell-off. 

Schroders' preference is currently for the front end of the US curve, which may benefit from Fed rate cuts, while avoiding the long end that could suffer from fiscal decline and inflation risks. 

In Schroders' view, Australia's stronger fiscal position and controlled inflation may make it more appealing than the US.

Similarly, Schroders considers that diversifying into Germany may be an attractive option, anticipating that European Union investors will sell US treasuries and shift cash back home. Inflation-linked bonds, particularly Australian 10-year bonds with attractive real yields, are becoming appealing as a hedge against future inflation.
 

3. Credit 

With credit spreads widening, Schroders considers that Australian credit and, in particular, higher-yielding bank Tier 2s and BBB companies may offer attractive value and access to inflation-protected sectors such as infrastructure and utilities. While there may be opportunities in US high yield, Schroders believes it’s premature to dive back in just yet.
 

4. Foreign Exchange

Schroders’ view is that the US dollar is likely to face structural pressures, leading us to favour the Japanese Yen and Euro, as well as the Australian dollar, which appears undervalued but remains sensitive to sentiment in China.

DISCLAIMER

This document is issued by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473) (Schroders).   

This document does not contain and should not be taken as containing any financial product advice or financial product recommendations.  This document does not take into consideration any recipient’s objectives, financial situation or needs.  Before making any decision relating to a Schroders fund, you should obtain and read a copy of the product disclosure statement available at www.schroders.com.au or other relevant disclosure document for that fund and consider the appropriateness of the fund to your objectives, financial situation and needs. You should also refer to the target market determination for the fund at www.schroders.com.au. All investments carry risk, and the repayment of capital and performance in any of the funds named in this document are not guaranteed by Schroders or any company in the Schroders Group.  The material contained in this document is not intended to provide, and should not be relied on for accounting, legal or tax advice.  

Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this document. To the maximum extent permitted by law, Schroders, every company in the Schroders plc group, and their respective directors, officers, employees, consultants and agents exclude all liability (however arising) for any direct or indirect loss or damage that may be suffered by the recipient or any other person in connection with this document. 

Opinions, estimates and projections contained in this document reflect the opinions of the authors as at the date of this document and are subject to change without notice. “Forward-looking” information, such as forecasts or projections, are not guarantees of any future performance and there is no assurance that any forecast or projection will be realised. Past performance is not a reliable indicator of future performance. All references to securities, sectors, regions and/or countries are made for illustrative purposes only and are not to be construed as recommendations to buy, sell or hold. 

Telephone calls and other electronic communications with Schroders representatives may be recorded.