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The April 2nd “Liberation Day” tariff announcement marked a significant and abrupt shift in U.S. trade policy. The market’s reaction was resoundingly negative, with the S&P 500 sinking 4.8%, the worst one-day drop since June 2020.
What happened? The Administration introduced a 10% universal baseline tariff on all imports, alongside additional country-specific tariffs. Once implemented, the duration of the tariffs will determine their ultimate impact. The U.S. economy ended 2024 with solid growth, low unemployment, and inflation trending lower. But a slew of chaotic policy announcements has dramatically increased the chances of an economic accident, heightened by the certainty of a tariff-related response from our trading partners. No one wins a trade war.
Bottom line: We believe the Administration does not want markets to move dramatically lower from here. Any further tightening of financial conditions will increase the chances of a recession that may become difficult to compensate for with monetary policy easing and the announcement of other policy priorities – specifically, taxes and deregulation – before the next mid-term elections. The Administration would prefer higher growth and lower inflation twelve months from now to maintain and increase the Republican majority in Congress.
What do the tariffs mean for the average U.S. tariff rate – and government revenue?
As a result of these measures, the effective average tariff rate in the U.S. is projected to rise to approximately 18–22%, representing the highest level of trade protectionism implemented in over a century.
The primary difference between the “Liberation Day” announcement and the historical record lies in the scale of import reliance within the U.S. economy. Currently, the U.S. imports goods equivalent to about 14% of GDP—substantially higher than the approximately 4% observed when tariffs were at comparable levels one hundred years ago. This structural shift implies that the newly implemented tariffs will generate significantly more revenue than in the past. Adding up all the tariffs announced to date implies more than a $600 billion annual increase in government revenue. This figure is vitally important when considering the motivations behind the announcement, discussed below. More importantly, it renders the effective tariff rate far more consequential for the broader economy, amplifying both its fiscal and macroeconomic impact.
What is the motivation behind the tariffs?
There are several theories to explain why the Trump administration is implementing the largest tariff increase in over a century. We hold a multi-pronged view.
First, tariffs are revenue generators for the government – they are a form of taxation. With the Administration seeking to make the 2017 TCJA tax cuts permanent through the budget reconciliation process, they are under pressure to demonstrate that it will be long-term “debt neutral.” We believe the tariffs are intended as a mechanism to offset revenue loss from extending the tax cuts. In fact, it may be that implementing the Administration’s tax priorities is a significant factor in the calculation of the total tariff revenue to be collected. If so, then once a fiscal budget is approved later this year, we would hope that the immediate fiscal revenue imperative disappears – reducing the level and scope of the tariffs might follow.
Other motivations include a desire by the Administration to decouple from global supply chains, reduce trade deficits, and boost domestic production, thereby increasing U.S. manufacturing jobs. It is apparent that the Administration is willing to take increasingly risky positions as a negotiating tactic to achieve policy priorities. The recent announcement may simply be the starting point for further negotiation, with iterations of the policy to come based on the Administration’s fluid assessment of costs versus benefits. We don’t expect this to be the final version of tariff policy.
How will the U.S. economy be affected?
In the short term, tariffs function as a tax on imports. This policy shift represents the most significant “tax increase” in recent U.S. history. As such, they will exert a contractionary effect on the U.S. economy and put upward pressure on prices. Most analysts are quickly marking down their outlook for U.S. growth and marking up their forecasts for inflation. A short burst of “stagflation” cannot be ruled out.
In the medium term, the economic effects become more ambiguous as consumer behavior adjusts and trade patterns realign. The initial inflationary shock is expected to suppress real demand, leading to a period of subdued economic growth and potentially disinflationary pressure due to weaker consumption.
Over the long term, we do not anticipate these tariffs will remain in place in their current form. Our view is that they are primarily a strategic lever to facilitate the extension and codification of the 2017 tax cuts. Accordingly, we foresee a short-term stagflationary impulse, a medium-term environment characterized by low growth and low inflation, and a long-term reversion toward macroeconomic equilibrium as the policy environment normalizes.
It is important to note that there is considerable uncertainty around the economic implications. The durability or transience of the recent tariffs will have a considerable impact on the economic outturn. While we believe the Administration will attempt to avoid a recession, once the U.S. economy begins to adjust to the new tariff environment, it may prove difficult to course correct prior to a downturn.
How will tariffs affect monetary policy and yields in the U.S.?
Inflation is expected to experience a one-time upward shock. If so, the Federal Reserve (“Fed”) is likely to look through this development, viewing it as transitory, provided that long-term inflation expectations remain well-anchored. Then, should economic growth slow as expected, the Fed will likely lower rates – more, and faster – than we expected prior to the tariff announcement. That is, the Fed will prioritize economic growth over inflation concerns. Longer term yields could move decisively lower even before the Fed can act, as recession probabilities increase.
As the inflationary effects of tariffs dissipate and rate cuts begin to take effect, the economy could begin to reaccelerate. At the same time, other policy priorities of the Administration are expected to take center stage. Tax cuts and deregulation can provide a lift to the economy to offset the contractionary tariff impact.
Given this outlook, we project that by year-end, the Fed could cut rates at least three times. Slower growth will create the conditions for the Fed to lower rates toward a neutral stance or below, should conditions warrant.
What are the expected financial market implications?
We remain in a highly uncertain investment environment. The first ten weeks of the new Administration have seen an unprecedented flurry of executive orders and activity in Washington D.C. The policy environment has not influenced the economic and investment outlook to this magnitude in a very long time. Hence, having conviction in taking or shedding risk remains elusive.
U.S. large cap growth and small-cap equities have experienced the most pronounced drawdowns in response to the recent tariff announcements, primarily due to their elevated valuations and greater sensitivity to macroeconomic uncertainty. Concurrently, long-term Treasury yields have declined from their recent highs, reflecting investor concerns over future U.S. economic growth. Credit spreads have widened, indicating increased risk aversion in fixed income markets. The U.S. dollar has depreciated against a basket of foreign currencies, while gold has appreciated, reaffirming its role as a defensive asset during periods of elevated uncertainty.
Despite the market correction, current equity valuations have become more attractive on a forward-looking basis, offering improved risk-adjusted return potential.
Conclusion
We believe the most likely outcome of the tariffs is increased market volatility as the outlook for the global economy adjusts. A “whiff of stagflation” lasting a few quarters is our base case, with macroeconomic conditions stabilizing over time. Under this scenario, equity markets could recover from the initial tariff shock and deliver attractive medium-term returns supported by more favorable valuations.
There are risks: stagflation is the most challenging environment for central bankers. If the tariffs persist and monetary policymakers are indecisive (or wrong-footed), it is possible that tariff-induced inflation and weaker consumer demand could trigger a recession. In this scenario, risk assets underperform on a medium-term horizon, with growth and small-cap equities disproportionately affected. Conversely, long-duration government bonds would offer strong returns as the Fed aggressively cuts interest rates. Credit markets, however, would suffer negative returns due to significant spread widening and deteriorating fundamentals. Currently, this is our risk case.
Should tariff overhangs recede—through negotiations, revised deals, or clear policy guidance—we would look for opportunities to add to our risk allocations. In that scenario, the market could pivot from fear to optimism at more attractive valuations than in the recent past, driven by reduced trade tensions and a renewed spotlight on pro-growth measures. Historically, market corrections that are not accompanied by a recession in the real economic data are short-lived and shallow. Should the current environment persist, we would aim to capitalize on the market’s overreactions.
Given our outlook, we believe it is prudent to maintain our existing asset allocation and remain disciplined in our approach. We will closely monitor evolving macroeconomic conditions and policy developments; we are prepared to adjust positioning as needed within this shifting economic paradigm.
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Important Disclosure: The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances. This document has been prepared with the assistance of Microsoft Copilot, an AI-powered tool designed to enhance productivity and provide support in drafting, editing, and organizing content. Microsoft Copilot leverages advanced AI models to generate text based on user input. Although Copilot generates original content based on user input, there is a risk that the generated text may inadvertently resemble existing works that may not be properly cited.
