President Trump’s decision at the start of February to impose tariffs sent ripples through global markets. A 25% tariff on imports from Mexico, a 25% tariff on Canadian imports—excluding energy, which faces a 10% tariff—and a 10% tariff on Chinese goods caused an immediate negative reaction. Equities declined, and currencies such as the Canadian dollar, euro, and Mexican peso weakened against the US dollar.
Investors were particularly unsettled by the unexpectedly high tariffs on Canada and Mexico, leading to concerns over economic stability. Initial projections suggested a potential 0.5% decline in US GDP. However, given the uncertainty surrounding the longevity and scope of these tariffs, it is premature to draw firm conclusions. The market responded positively after agreements with Mexico and later Canada led to a temporary pause on the tariffs for further negotiations. Nevertheless, trade restrictions remain a crucial point in Trump’s strategy, keeping investors on edge.
While Europe was not directly affected by the first round of tariffs, its trade surplus may soon be targeted. The cyclicality of the Eurozone economy adds to its vulnerabilities, particularly as the US continues to impose tariffs globally. Despite these headwinds, US equities remain resilient, with earnings growth serving as a key driver of market performance.
The latest earnings season has been strong, with 74% of companies surpassing expectations. The earnings surprise averaged around 4.4%, while the Magnificent Seven outperformed with a 5.7% surprise, compared to the broader S&P 500 at 3.9%. This robust performance underscores the strength of US corporations, even amid geopolitical tensions and trade uncertainties.
Monetary policy also plays a pivotal role in shaping market expectations. The Federal Reserve held interest rates steady, a widely anticipated move that had little immediate impact on markets. Investors are now pricing in the next rate cut for June. Unless the disinflation trend continues, the Fed is unlikely to cut rates to counter tariff-driven growth concerns. Encouragingly, shelter inflation, a key inflationary component, has shown further moderation, while the Atlanta Fed wage growth tracker has declined to near 4%.
In contrast, the European Central Bank (ECB) has already embarked on a rate-cutting cycle. President Lagarde acknowledged economic headwinds but remains optimistic about a gradual recovery, bolstered by the ECB’s accommodative stance. This divergence in central bank policies between the US and Europe presents unique investment opportunities as capital flows respond to shifting monetary dynamics.
The Bank of England faces a particularly complex challenge. While markets were expecting a rate cut to address economic stagnation, persistent inflationary pressures have limited the BoE’s ability to act aggressively. Policymakers must strike a delicate balance between stimulating growth and preventing inflation from reaccelerating—a tightrope that will demand careful navigation in the months ahead.
With trade tensions, central bank policies, and earnings strength shaping the investment landscape, investors must remain adaptable. Opportunities persist amid uncertainty, and those who stay ahead of market shifts stand to benefit from evolving global trends.
Arbuthnot Banking Group PLC (LON:ARBB), trading as Arbuthnot Latham, provides private and commercial banking products and services in the United Kingdom. Founded in 1833, Arbuthnot Banking is based in London, United Kingdom.
