A WORD ON

Frédéric Tassin
Head of Global and Thematic Equities
OFI INVEST ASSET MANAGEMENT

Frédéric Tassin, Head of Global and Thematic Equities at Ofi Invest AM, provides some insight on Donald Trump’s tariff announcements and the impact they could have on US markets.

What are some initial market takeaways following Trump’s 2 April tariff announcements?

The markets have clearly sanctioned the US president’s announcements. Investors were expecting a hike in tariffs, but here they were doubly surprised: nobody thought the tariffs would be so high, and everybody was surprised by the White House’s calculation method, which doesn’t seem to make any sense. For example, even some countries that were running a trade deficit with the US were hit with additional taxes on their exports to the US. Another surprise was the muted reaction from Treasury Secretary Scott Bessen, whom Wall Street usually respects, which suggested that there was no one in Trump’s camp able to play the role of moderator and counterweight.

This triggered an across-the-board equity market collapse, with losses of almost 4,000 billion dollars within a few trading sessions in early April and a drying up of liquidity on the US bond markets, which pushed up 10-year and 30-year bond yields⁽¹⁾. This is very certainly what caused the US president to decree a 90-day moratorium on these tariffs, effective 9 April, which, in turn, triggered a market rally. One month later, Sino-US negotiations led to an agreement to reduce tariffs on Chinese products from 145% to 30% for a 90-day period beginning 14 May, while Beijing lowered its own tariffs to 10% on most US goods.

US LONG BOND YIELDS

US EQUITY INDICES

Donald Trump’s strategy, which he had laid out clearly in The Art of the Deal, consisting of striking hard, then negotiating, sticks to the style he has employed for more than 30 years. However, this method now seems to be less appreciated by Wall Street and Corporate America. US businessmen and some members of Congress have been critical, fearing that these measures will boost prices significantly, eat into margins and ultimately raise unemployment cause the economy to slip into recession. Some members of Congress who have spoken out even include Republicans, who have not ruled out the possibility of taking over tariff negotiations. Among the business leaders, Jamie Dimon, the head of JP Morgan, who has the ear of the Trump camp, has entered the fray on two occasions, predicting a major economic shock marked by higher inflation and unemployment that could cause an increase in personal bankruptcy rates⁽²⁾. This are voices that count and raise hope for a return to an approach less brusque than that laid out in The Art of the Deal.

Companies, including US ones, on the whole expect to be hit hard by the higher tariffs. To mitigate this impact, they have several possible strategies in theory: renegotiate with suppliers to obtain the best possible prices, allowing them to lower their production costs; optimise their logistics chain; and, to a lesser extent, pass on higher costs to the end consumer. On this last point, they very quickly faced a dilemma: at first, US companies had said they would pass on the cost of higher import tariffs to the end-consumer. But a 25% hike in tariffs would be a greater challenge than a 10% increase. We estimate US imports at 3.2 trillion dollars. A 25% increase in tariffs therefore means almost 700 billion dollars in additional taxes for the US economy. If the tariffs are passed on fully to the 130 million US households, that works out to an average of 5,000 dollars per household budget per year. Obviously, companies will be unable to pass on the increased tariffs fully into consumer prices. Some of it will inevitably show up in the form of narrower margins. This could cause a direct impact, which was probably initially underestimated by the Trump team; to wit: if margins shrink too much, layoffs will follow. This is why the Trump team is beginning to slowly backpedal.

US CONSUMER CONFIDENCE

HOUSEHOLD INFLATION EXPECTATIONS

What is striking now in the US is the rising uncertainties surrounding economic policy and global trade. And these uncertainties will persist, regardless of the scenario. This is already showing up in decisions by some manufacturing companies to postpone their investment decisions, at least until the dust settles. Until now, the consensus of analysts had forecast an 8% increase in US corporate earnings in 2025. This figure now looks outdated, although it is hard for us to forecast where full-year earnings will end up. Meanwhile, whereas household consumption may seem to be at risk, a good surprise could come from foreign direct investment in the US, as companies in a number of industries have announced that they will be expanding their US investment plans for the purpose of reshoring production assets. So, the worst-case scenario is not the most likely one, but we are likely to see heighted volatility⁽³⁾ in the coming months.

In reaction to marked volatility - including sudden shifts like a 20% drop in equity markets in 24 hours, shifts not seen since the 2008 crisis - investors are advised to be disciplined. The best tactic consists of smoothing out cost bases by investing regularly. This mitigates the effects of volatility and helps avoid the temptation of trying to catch a “bottom” at any price, something that is extremely difficult, even for professionals.

Completed on 15 May 2025