Tariff Fallout: Where Do Markets Go From Here?

04/04/25 • 3 min

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As markets continue reacting to the Trump administration’s tariffs, Michael Zezas, our Global Head of Fixed Income Research and Public Policy Strategy, lists the expected impacts for investors across equity sectors and asset classes.

Read more insights from Morgan Stanley.

---- Transcript -----

Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan Stanley’s Global Head of Fixed Income Research and Public Policy Strategy. Today we’ll be talking about the market impacts of the recently announced tariff increases.

It’s Friday, April 4th, at 1pm in New York.

This week, as planned, President Trump unveiled tariff increases. These reciprocal tariffs were hiked with the stated goal of reducing the U.S.’s goods trade deficit with other countries. We’ve long anticipated that higher tariffs on a broad range of imports would be a fixture of U.S. policy in a second Trump term. And that whatever you thought of the goals tariffs were driving towards, their enactment would come at an economic cost along the way. That cost is what helped drive our team’s preference for fixed income over more economically-sensitive equities.

But this week’s announcement underscored that we actually underestimated the speed and severity of implementation. Following this week’s reciprocal tariff announcement, tariffs on imports from China are approaching 60 per cent, a level we didn’t anticipate would be reached until 2026. And while we expected a number of product-specific tariffs would be levied, we did not anticipate the broad-based import tariffs announced this week. All totaled, the U.S. effective tariff rate is now around 22 per cent, having started the year at 3 per cent.

So what’s next? Our colleagues across Morgan Stanley Research have detailed their expected impacts across equity sectors and asset classes and here are some key takeaways to keep in mind.

First, we do think there’s a possibility that negotiation will lower some of these tariffs, particularly for traditional U.S. allies like Japan and Europe, giving some relief to markets and the economic outlook.

However, successful negotiation may not arrive quickly, as it's not yet clear what the U.S. would deem sufficient concessions from its trading partners. Lower tariff levels and higher asset purchases might be part of the mix, but we’re still in discovery mode on this. And even if tariff reductions succeed, it's still likely that tariff levels would be meaningfully higher than previously anticipated.

So for investors, we think that means there’s more room to go for markets to price in a weaker U.S. growth outlook. In U.S. equities, for example, our strategists argue that first-order impacts of higher tariffs may be mostly priced at this point, but second-order effects – such as knock-on effects of further hits to consumer and corporate confidence – could push the S&P 500 below the 5000 level.

In credit markets, weakness has been, and may continue to be, more acute in key sectors where tariff costs are substantial; and may not be able to pass on to price, such as the consumer retail sector. These are companies whose costs are driven by overseas imports.

So what happens from here? Are there positive catalysts to watch for?

It's going to depend on market valuations. If we get to a point where a recession is more clearly in the price, then U.S. policy catalysts might help the stock market. That could include negotiations that result in smaller tariff increases than those just announced or a fiscal policy response, such as bigger than anticipated tax cuts.

Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Read more insights from Morgan Stanley.

---- Transcript -----

It’s Friday, April 4th, at 1pm in New York.

So what’s next? Our colleagues across Morgan Stanley Research have detailed their expected impacts across equity sectors and asset classes and here are some key takeaways to keep in mind.

So what happens from here? Are there positive catalysts to watch for?

Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

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Tariff Roundtable: Global Economy on the Brink of Recession?

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---- Transcript -----

Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's, Global Chief Economist, and today we're going to be talking tariffs and what they mean for the global economy.

It's Monday, April 7th at 10am in New York.

Jens Eisenschmidt: It's 4pm in Frankfurt.

Chetan Ahya: And it's 10pm in Hong Kong.

Seth Carpenter: And so, I'm here with our global economists from around the world: Mike Gapen, Chief U.S. Economist, Chetan Ahya, our Chief Asia Economist, and Jens Eisenschmidt, our Chief Europe Economist. So, let's jump into it. Let me go around first and ask each of you, what is the top question that you are getting from investors around the world?

Chetan?

Chetan Ahya: Tariffs.

Seth Carpenter: Jens?

Jens Eisenschmidt: Tariffs.

Seth Carpenter: Mike?

Michael Gapen: Tariffs.

Seth Carpenter: All right. Well, that seems clear. Before we get into the likely effects of the tariffs, maybe each of you could just sketch for me where you were before tariffs were announced. Chetan, let me start with you. What was your outlook for the Chinese economy before the latest round of tariff announcements?

Chetan Ahya: Well Seth, working with our U.S. public policy team, we were already assuming a 15-percentage point increase on tariffs on imports from China. And China also was going through some domestic challenges in terms of high levels of debt, excess capacities, and deflation. And so, combining both the factors, we were assuming China's growth will slow on Q4 by Q4 basis last year – from 5.4 percent to close to 4 percent this year.

Jens, what about Europe? Before these broad-based tariffs, how were you thinking about the European economy?

Jens Eisenschmidt: We had penciled in a slight recovery, not really getting us much beyond 1 percent. Backdrop here, still rising real wages. We had some tariffs in here, on steel, aluminum; in cars, much again a bit more of a beefed-up version if you want, of the 18 tariffs – but not much more than that. And then, of course, we had the German fiscal expansion that helped our outlook to sustain this positive growth rates into 2026.

Seth Carpenter: Mike, for you. You also had thought that there were going to be some tariffs at some point before this last round of tariffs. Maybe you can tell us what you had in mind before last week's announcements.

Michael Gapen: Yeah, Seth. We had a lot of tariffs on China. The effective rate rising to say 35 to 40 percent. But as Jens just mentioned, outside of that, we had some on steel and aluminum, and autos with Europe, but not much beyond that. So, an effective tariff rate for the U.S. that reached maybe 8 to 9 percent.

We thought that would gradually weigh on the economy. We had growth at around 1.5 percent this year and 1 percent next year. And the disinflation process stopping – meaning inflation finishes the year at around 2.8 core PCE, roughly where it is now. So, a gradual slowdown from tariff implementation.

Seth Carpenter: Alright, so a little bit built in. You knew there was going to be something, but boy, I guess I have to say, judging from market reactions, the world was surprised at the magnitude of things. So, what's changed in your mind? It seems like tariffs have got to push down the outlook for growth and up the out outlook for inflation. Is that about right? And can you sketch for us how this new news is going to affect the outlook?

Michael Gapen: Sure. So instead of effective tariff rates of 8 to 9 percent, we're looking at effective tariff rates, maybe as high as 22 percent.

Seth Carpenter: Oh, that's a lot.

Michael Gapen: Yeah. So more than twice what we were expecting. Obviously, some of that may get negotiated down.

Seth Carpenter: And would you say that's the highest tariff rate we've seen in a while?

Michael Gapen: At least a century. If we were to a 1.5 percent on growth before, it's pretty easy to revise that down, maybe even a full percentage point, right?

So you’re, it's a tax on consumption and a tariff rate that high is going to pull down consumer spending. It's also going to lead to even much higher inflation than we were expecting. S...