�۶���Ƶ

Podcast: Jump Start: Tariff threats on the EU and Mexico, CPI, and earnings (6 min)
Video: CIO mid-year checklist – Key portfolio steps with Jon Gordon (6 min)

What happened?

US President Donald Trump on Saturday threatened to impose 30% tariffs on imports from the European Union and Mexico, capping a week in which he went back on the offensive in negotiations with trade partners. The Stoxx Europe 600 index is down 0.5% at the time of writing, while S&P 500 futures for Monday's session are trading 0.5% lower. The EURUSD exchange rate is little changed at just below 1.17.

In a social media post, the president described his nation’s trade deficit as a risk to national security. The escalation in trade tensions comes after last week’s expiration of a 90-day pause on most of the “Liberation Day” tariffs announced by the White House on 2 April. There was a steady stream of trade threats through the week, starting with the delivery of a batch of letters to 14 nations announcing that higher tariffs would be introduced on 1 August unless further concessions were made. The administration also indicated it would implement a 50% tariff on copper imports, along with duties of up to 200% on pharmaceuticals entering the US.

The more aggressive stance on tariffs has so far failed to shake investor optimism. The S&P 500 struck an all-time high late in the week, and even after a 0.3% decline on Friday, the index is up 25.7% from its low for the year on 8 April, when concerns over trade were most intense. This hopeful reaction contrasts with the 12% fall in US stocks in the week following Trump’s “Liberation Day” address on 2 April, in which he outlined a series of “reciprocal” tariffs on US trading partners that run goods trade surpluses with the US.

What do we expect?

Despite the noise, we believe the most likely scenario remains that the US effective tariff rate ends the year at around 15%. IEEPA tariffs are likely to be declared illegal by the US Supreme Court, in our view, but not until later this year or early next year. President Trump's changeable use of the IEEPA in the past week, to justify tariffs on Brazil, further bolsters our view. The tariff wall can be rebuilt through other routes, such as country and product tariffs, but would be much more limited in scope.

So, how do the latest events fit with this view? The resilience of US economic data and stocks rising to fresh highs appear to have emboldened President Trump to maximize his pressure tactics to increase his leverage in bilateral trade negotiations. Taken together, the current proposed tariffs would lift the US effective tariff rate close to or even above 2 April levels.

If the administration were to implement the aforementioned tariffs on 1 August and leave them at those levels, the likelihood of a US profits and economic recession would increase. US Treasury Secretary Bessent understands the importance of not lifting tariffs to a level that would risk harming economic activity, particularly since the deficit-to-GDP ratio will remain around 7% over the next few years following the passage of the OBBBA. A Wall Streat Journal report citing an unnamed US official who claims that Canada and Mexico tariffs will receive USMCA exemption suggests the administration is at least aware of the potential damage.

We therefore believe that the administration is using this latest round of tariff escalation to maximize its negotiating leverage and that it will ultimately de-escalate, especially if there is a new bout of heightened bond and stock market volatility.

With respect to the European Union (EU), our base case remains that the two sides will likely reach an agreement before 1 August, or the administration will extend the deadline again while negotiations are ongoing. However, the US president’s seemingly maximalist and aggressive demands—including “complete, open market access to the United States, with no tariff being charged to us”—make it difficult to predict the EU’s response. There is now a non-negligible risk that trade tensions between the EU and the US escalate, which would be damaging for both economies.

On our estimates, European economic growth in the second half of the year could easily turn negative as weaker external demand and further declines in business confidence, investment, and hiring weigh on activity. In this scenario, as per the European Central Bank’s June forecasts, we would expect the central bank to ease rates by more than currently anticipated, potentially approaching 1% in the coming months. For more on this, read our blog, President Trump threatens 30% tariff on EU imports.

Turning to Mexico, in his letter threatening the 30% tariffs, President Trump acknowledged Mexico’s recent progress on border security but stressed that more action is needed against drug cartels and existing trade barriers. Our view is that all three areas are moving in the right direction.

We do not expect Mexico to retaliate in a disruptive way and although details are still emerging, it appears the 30% tariff would apply only to a small share of trade that is not compliant with the USMCA trade pact. This suggests the risk of a major trade conflict is low. The upcoming review of the USMCA agreement is becoming increasingly relevant. We expect the agreement to remain in place, even if negotiations bring greater US demands. For more on this, read our blog, Mexico: Tariff shock mitigated by USMCA.

How do we invest?

The Trump administration looks likely to persist with its confrontational negotiating tactics, which could lead to renewed market swings. It is also possible that the White House will only back away from its latest threats if the market falls. We have been advising investors to take steps to bolster the resilience of their portfolios against this uncertain backdrop. This includes the following:

Phasing into equities: In our view, any further rise in the S&P 500 this year is likely to be limited before greater policy clarity and renewed Federal Reserve easing help push the market higher in 2026. One way to manage near-term risks is to phase into equities, building exposure gradually and taking advantage of pockets of volatility. US technology, health care, and financials; select Asian tech sectors (Taiwan, India, mainland China); and quality or thematic plays in Europe all offer attractive growth prospects. Early allocation allows investors to capitalize on these trends as they unfold.

Consider strategies to mitigate policy risks: These can include an allocation to gold, which has proven to be a reliable hedge against geopolitical and policy uncertainty over recent years. We believe a mid-single-digit percentage allocation to gold in a USD portfolio can diversify and hedge against political risk and inflation. A modest allocation to select hedge funds can enhance portfolio resilience, take advantage of volatility, and smooth overall return outcomes. Finally, any renewed market swings can be used to lock in gains and make portfolios more defensive with capital preservation strategies.

Focus on long-term opportunities: Innovation remains a key driver of long-term equity performance and an important feature of enduring market leaders. Structural shifts in AI, energy infrastructure, and health care are expanding global profit pools and reshaping industries. We expect our TRIO themes— Artificial intelligence, Power and resources, and Longevity—to offer durable, secular growth that we believe can persist well beyond short-term market volatility.

Reduce excess dollar exposure: The USD’s traditional role as a perceived “safe haven” is being called into question. Investors have already begun reassessing excess exposure to USD assets amid increasingly unpredictable US policymaking. Further near-term uncertainty is likely to give support to perceived "safe haven" currencies and commodities like the CHF (and to some degree the JPY) versus the USD. The euro has been the main currency for many to express concerns around the resilience of the US economy and the US dollar. Although it is hard to judge the short-term market reaction, the prospects of lower US growth and the Fed having room to cut US interest rates favor a weaker USD. We therefore like to make use of any EURUSD pullback to position for an exchange rate move to 1.20 or higher over the coming quarters.