President Trump’s recent tariff actions have set off wild swings in financial markets. Amid the upheaval, many investors may be wondering how to navigate markets in a new world of steeply higher trade barriers. Morgan Stanley’s Global Investment Committee sees three big repercussions that investors should keep in mind as they weigh their next portfolio moves.
How to Invest Through Tariff Turbulence
Apr 8, 2025
Soaring tariffs have triggered market mayhem. How can you help minimize the bite to your portfolio?
Key Takeaways
- Odds of a recession or stagflation have jumped following President Trump’s recent tariff actions.
- Corporate profitability is at risk, with 2025 S&P 500 earnings estimates dropping from $270 per share to around $255 or $260.
- Unclear objectives from the administration are only adding to investors’ frustration and stoking market volatility.
- While awaiting more clarity, investors should avoid panic and consider adding exposure to short-term fixed income, private investments and real assets.
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Tariffs: Firing the “Bazooka” Into the Dark
Tariff news has sent global markets into a rout and driven economic outlooks lower. With uncertainty remaining, how should investors position their portfolios?
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1Economic forecasts have turned gloomier.
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.
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2Corporate profitability is likely at risk.
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.
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3Lack of clear objectives clouds the outlook.
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.
How to Invest
A lot can still change. There is time for countries to negotiate with the U.S., and it appears that the administration is open to bilateral talks. Odds are at least 50/50 that policy will change over the next 90 days. For now, the Global Investment Committee is taking a wait-and-see approach.
In the meantime, we suggest investors avoid knee-jerk reactions. Consider:
- Adding excess reserves to short-term fixed income.
- Boosting exposure to private investments amid market turbulence.
- Increasing allocations to real assets, such as commodities, for a potential inflation hedge.
Long-term investors should consider 5100-5500 a defensible range for adding exposure to the traditional “cap-weighted” S&P 500 (in which the largest stocks have the biggest impact on performance)—although the “equal-weighted” index (which allocates the same amount to each stock) is still preferred.
Overall, be patient, vigilant and diversified.
This article is based on Lisa Shalett’s Global Investment Committee Weekly report from April 7, 2025, “Tariffs: Firing the ‘Bazooka’ into the Dark.” Ask your Morgan Stanley Financial Advisor for a copy. Listen to the audiocast based on this report.
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