Financial markets have been remarkably resilient in the face of President Trump’s relentless tirade about tariffs with America’s trading partners and cost-cutting efforts by the Department of Government Efficiency (DOGE). So far, most announced tariffs have a delayed implementation date, suggesting the levies may be used as a negotiating tool rather than permanent policy change.
The ultimate size, scope, and duration of new tariffs are key to how they will affect the economy, interest rates, and the stock markets. Tariffs impart a modest stagflationary shock to the economy, as the price-boosting effects of tariffs erode growth in real income, thereby weighing on growth in consumer spending. In Canada, the threat of looming tariffs has already discouraged domestic capital investment.
The U.S. Federal Reserve decided to pause its easing cycle at its last policy meeting on January 29th due to a combination of solid economic activity and an inflation rate that remains elevated, above the Fed’s target of 2%. Stickier inflation means consensus expectations for further rate cuts have been pushed out to the latter half of the year, with more gradual easing compared to many other advanced economy central banks, including the Bank of Canada.
Relative resilience in U.S. economic activity combined with more restrained Fed easing should support the greenback against most other currencies over the foreseeable future. A strong U.S. dollar is a headwind on profits for U.S. based multi-national companies. With the earnings season largely behind us for the S&P 500 companies, forward earnings per share (EPS) guidance taken into account prevailing currency rates. The consensus for EPS growth in 2025 is 11.4%, which supports the potential for positive price returns this year, although the outlook remains uncertain due to concerns over U.S. trade policy.
Investors should resist the temptation to adjust asset mix based on current events, but rather, stay invested within a portfolio asset mix that meets their risk tolerance level, return objectives, and liquidity needs. Their equity holdings should be diversified across industry sectors and geographies, consisting of financially sound companies led by experienced management teams.
