In the short run, U.S. economic-growth expectations are falling. At the same time, tariff-related price increases are likely to send inflation higher toward 5%. Hotter inflation could make the Federal Reserve unlikely to cut interest rates, barring a recession. In fact, after the April 2 tariff news, Morgan Stanley Research has removed its forecast for a June rate cut and now expects no cuts until March 2026. The implication is that odds of a recession or “stagflation,” in which growth slows and inflation persists, have increased. Meanwhile, the probability of a “soft landing,” featuring steady growth and muted price pressures, has fallen.

Tariff consequences will be felt either by U.S. consumers, in the form of higher prices, or by U.S. companies, in the form of lower profit margins – or some combination of the two. In almost any scenario, corporate profitability is likely at risk. The Global Investment Committee sees 2025 earnings estimates for the S&P 500 declining from $270 per share to closer to $255 or $260. This would likely keep the index trading in a band between 5100 and 5900.

Perhaps most frustrating for investors is the ongoing uncertainty about the administration’s ultimate objectives in issuing these tariffs:

• Is the goal to generate revenues for the U.S. government to help fund its swelling budget deficits? In that case, room for trading partners to negotiate lower levies is likely narrow and the tariffs long-lived, maintaining the combined risks of lower growth and higher inflation.
• Or is the aim to incentivize U.S. “onshoring” of manufacturing? That may be a laudable goal, but it likely comes with long timelines. Additionally, given the use of automation in manufacturing and other sectors, it would probably be disappointing in terms of job creation.
• Or, lastly, is it to make global markets more favorable for U.S. exporters? For example, trading partners might negotiate lower duties on U.S. exports in exchange for reduced levies on their goods. That scenario is the most bullish for corporate earnings, but it would require concessions from our allies and counterparties, who may not be anxious to capitulate given their own political challenges.