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April 2025 Tariff Changes: Forecasting Economic Outcomes and Strategies

Impact of April 2025 U.S. Tariffs: Economic and Market Outlook

Thesis and Summary of Findings

The U.S. government’s April 2, 2025 tariff package – dramatically nicknamed “Liberation Day” by President Trump – represents one of the most sweeping trade actions in decades (Trump administration plans April 2 ‘tariff wall’ | Grant Thornton). It targets a broad range of imports from major trading partners with “reciprocal” tariffs, aiming to equalize foreign trade barriers and reduce the $1.2 trillion U.S. goods trade deficit (US may exclude sector-specific tariffs on April 2, reports say, but situation fluid | Reuters) (US may exclude sector-specific tariffs on April 2, reports say, but situation fluid | Reuters). Our in-depth analysis finds that these tariffs will weigh on U.S. economic growth (with an estimated ~0.4% GDP drag and 300,000+ jobs at risk (Trump’s “Liberation Day”: The April 2 Tariff Plan and Its Potential Economic Impact)), raise domestic prices modestly, and provoke retaliation and policy responses worldwide. Major trade partners – from China to the EU – have condemned the tariffs and signaled or enacted countermeasures, heightening the risk of an escalating trade war.

To offset the economic drag, U.S. policymakers are pursuing stimulus measures. On the fiscal side, the administration and Congress are advancing tax cuts and spending programs (e.g. making 2017 tax cuts permanent, infrastructure investments) to spur domestic demand. On the monetary side, the Federal Reserve is poised to adjust policy if needed – already noting “unusually elevated” uncertainty (Fed in no rush to cut rates; Trump disagrees | Reuters) and indicating openness to rate cuts later in 2025 if growth falters (Fed in no rush to cut rates; Trump disagrees | Reuters).

Forecasting the U.S. economy through Q1 2026, our probability-based model points to a moderate-growth base case (GDP ~1.5–2% in 2025, inflation ~2.5–3%, unemployment edging up to ~4.5%) with a 60% probability. Downside scenarios (25% probability) could see near-zero growth by late 2025 if the trade war intensifies or global conditions deteriorate, while an upside scenario (15% probability) – featuring quick trade resolutions and robust stimulus – could lift growth above 2.5%.

Financial markets are expected to remain volatile but resilient under the base case. We project modest gains for major U.S. stock indices by year-end 2025 (S&P 500 +5% to mid-4,000s, recouping early-2025 losses) and further improvement by Q1 2026, aided by clearer trade conditions and potential Fed easing. However, outcomes will vary widely by sector. Defensive, domestically oriented sectors (e.g. Utilities, Healthcare, Consumer Staples) are poised to outperform, given their stable demand and limited trade exposure. Trade-sensitive industries (Manufacturing, Autos, certain Tech hardware, Materials) and cyclical sectors (Consumer Discretionary, Industrials, Financials) are likely to underperform until trade tensions ease. In line with a capital-preservation strategy, high-dividend and low-volatility equity strategies should outperform in this environment – for example, funds like LVHI (international low-vol/high-dividend) and SCHD (U.S. dividend equity) offer attractive defensive profiles. Conversely, portfolios heavily tilted toward export-dependent or high-beta growth segments may lag.

Bottom Line: The new tariffs mark a turning point in U.S. trade policy with meaningful economic ramifications. A moderate slowdown in U.S. growth is anticipated as higher import costs and foreign retaliation take a toll, but proactive fiscal and monetary measures are expected to cushion the impact. Investors should brace for near-term volatility and favor quality, income-generating equities and resilient sectors, positioning for capital preservation while keeping some upside exposure if policy risks abate. The master table at the end of this report summarizes our key projections, sector outlooks, and asset class performance probabilities under a moderate-conservative scenario.

Details of the April 2, 2025 Tariff Package

On April 2, the administration is set to unveil a “comprehensive reciprocal tariff” plan under authorities like the International Emergency Economic Powers Act (IEEPA) and Section 301 of the Trade Act (No April Fools’ Joke: April 2 Tariff Actions Are Expected | Insights | Holland & Knight). The package is the culmination of President Trump’s aggressive trade agenda since taking office in January. Key aspects of the new tariffs include:

Intended Goals: President Trump has cast April 2 as “Liberation Day” for the U.S. economy (US may exclude sector-specific tariffs on April 2, reports say, but situation fluid | Reuters), claiming these steps will free American industry from unfair foreign practices. The stated goals are to shrink the trade deficit, boost domestic manufacturing by making imports pricier, and force trading partners into bilateral deals on more favorable terms (No April Fools’ Joke: April 2 Tariff Actions Are Expected | Insights | Holland & Knight) (Trump administration plans April 2 ‘tariff wall’ | Grant Thornton). The administration’s America First Trade Memo (Feb 13, 2025) laid the groundwork, instructing agencies to calculate the “equivalent reciprocal tariff” for each partner and identify other unfair practices (like currency manipulation, subsidies, etc.) (Trump administration plans April 2 ‘tariff wall’ | Grant Thornton). In essence, the tariffs serve both as an immediate trade barrier and as a bargaining chip: officials like Treasury Secretary Scott Bessent suggest that if countries come to the table to lower their barriers, some U.S. tariffs “may not have to go on” or could be negotiated down (Trump administration plans April 2 ‘tariff wall’ | Grant Thornton). It is clear, though, that absent such concessions, the U.S. is prepared to “erect its tariff wall” on April 2 (Trump administration plans April 2 ‘tariff wall’ | Grant Thornton), implementing what one expert called “the largest disruption to U.S. trade relationships in nearly a century.” (Trump administration plans April 2 ‘tariff wall’ | Grant Thornton)

International Reactions and Trade Partner Responses

The April 2 tariff salvo has already elicited strong reactions around the world. Major trade partners are bracing for impact, and many have vowed to retaliate or seek redress. Here are the key international responses and their potential influence on trade flows:

  • China: As the primary target of earlier tariff moves, China’s response has been the most vehement. Beijing officials delivered unusually fiery rhetoric, promising China will “fight to the end” in any “tariff war, trade war or any other war” if pressured by Washington (China vows it will ‘fight to the end’ with US in trade war – or any other war | China | The Guardian) (China vows it will ‘fight to the end’ with US in trade war – or any other war | China | The Guardian). When the U.S. raised tariffs on Chinese goods by an extra 10% in February (citing China’s alleged inaction on fentanyl trafficking), China retaliated swiftly in early March with 10–15% tariffs on $21 billion of U.S. agriculture exports (China hits US agriculture, says it won’t be bullied by fresh Trump tariffs | Reuters) (China hits US agriculture, says it won’t be bullied by fresh Trump tariffs | Reuters). These new Chinese levies hit staple U.S. farm goods (e.g. pork, fruits, grains) and were calibrated to hurt Trump’s political base in farm states. China also imposed export and investment curbs on 25 U.S. firms (mostly smaller firms, avoiding big names for now) under national security pretexts (China hits US agriculture, says it won’t be bullied by fresh Trump tariffs | Reuters). At the same time, Chinese officials signaled a hope to manage the conflict – setting their retaliation below U.S. tariff rates to leave room for negotiation (China hits US agriculture, says it won’t be bullied by fresh Trump tariffs | Reuters). Still, with the April 2 expansion looming, China’s Foreign Ministry lambasted the U.S. “bullying” and warned that if Washington “insists on a tariff war… China will fight till the end” (China vows it will ‘fight to the end’ with US in trade war – or any other war | China | The Guardian) (China vows it will ‘fight to the end’ with US in trade war – or any other war | China | The Guardian). We can expect Beijing to further retaliate in kind: likely measures include higher tariffs on remaining U.S. exports (especially aircraft, autos, and energy), curbs on U.S. companies in China, and potential restrictions on critical exports (e.g. rare earth metals crucial to U.S. tech manufacturing). Indeed, China has already hinted at limiting exports of certain key materials and continues to roll out domestic stimulus programs to bolster its economy (to offset weaker exports) (Investor’s Guide to the April Tariffs | Charles Schwab) (Investor’s Guide to the April Tariffs | Charles Schwab). Trade flows will adjust as China seeks alternate suppliers for agricultural goods and the U.S. finds new markets for farm products (e.g. soybeans to Europe or South America) – echoing the shifts seen during the 2018–2019 trade war. In sum, China’s reaction has been a mix of retaliation and resilience: tariffs for tariffs, alongside policies to support domestic demand and a public stance of defiance. This tit-for-tat dynamic between the world’s two largest economies greatly increases the risk of an extended U.S.-China trade war.
  • European Union: EU leaders have uniformly criticized the U.S. tariffs and signaled they will respond if European exports are hit. The EU’s trade commissioner and several national leaders have stressed that while they prefer dialogue, they are prepared to “defend European interests.” In fact, the EU has already drawn up a package of “sweeping countermeasures valued at €26 billion ($28 billion)” targeting U.S. goods (Trump’s “Liberation Day”: The April 2 Tariff Plan and Its Potential Economic Impact), to be imposed if the U.S. proceeds with tariffs on EU products (especially the auto sector). These counter-tariffs are expected to target iconic American exports – similar to the EU’s 2018 retaliation list that hit bourbon whiskey, motorcycles, and jeans – aiming to exert political pressure. The mere threat of a 25% U.S. auto tariff (a big concern for Germany and Japan) prompted the EU earlier to offer concessions: Europe signaled willingness to cut tariffs on U.S. cars and buy more American LNG (liquid natural gas) (Investor’s Guide to the April Tariffs | Charles Schwab). However, with the April 2 plan moving forward, European officials have expressed frustration that their goodwill gestures (and even Europe’s own low average tariffs of ~1–3% (Investor’s Guide to the April Tariffs | Charles Schwab)) were insufficient. The EU is also exploring a legal challenge at the World Trade Organization (WTO), though U.S. invocation of national security (IEEPA) could complicate WTO adjudication. Meanwhile, Europe is shoring up its economy: Germany approved a large defense and infrastructure spending package (~1.5% of GDP per year) to offset any export losses (Investor’s Guide to the April Tariffs | Charles Schwab) (Investor’s Guide to the April Tariffs | Charles Schwab), and the European Central Bank is poised to cut rates further if needed (Investor’s Guide to the April Tariffs | Charles Schwab). These steps, combined with Europe’s existing retaliatory tariffs on U.S. steel/aluminum and other goods (in place since the first Trump term), suggest the EU is both preparing to counterpunch and to cushion its own economy. In terms of trade flows, a prolonged tariff standoff could see European exporters (e.g. auto manufacturers) pivot more toward Asian and intra-European markets, while U.S. exporters of aircraft, machinery, and agriculture to Europe could lose market share to competitors (for instance, Airbus and Brazilian soybeans benefitting at Boeing’s and U.S. farmers’ expense if EU-China ties deepen).
  • Canada and Mexico: America’s neighbors – and largest trade partners – have been alarmed that the new tariffs include them, effectively overriding the spirit of the USMCA trade agreement. In March, the U.S. briefly imposed 25% tariffs on imports from Canada and Mexico that do not meet USMCA rules (justified by the White House as a response to the fentanyl crisis) (US may exclude sector-specific tariffs on April 2, reports say, but situation fluid | Reuters), but then paused these tariffs for a few weeks (Investor’s Guide to the April Tariffs | Charles Schwab). Canada and Mexico both objected strongly, and diplomatic talks have been underway. They are pushing to extend the exemption for all USMCA-compliant goods – which cover roughly 44% of their exports to the U.S. (Investor’s Guide to the April Tariffs | Charles Schwab) – and to avoid any new levies. Canada’s government has prepared its own retaliatory tariffs focusing on U.S. steel, aluminum, and consumer goods (mirroring its response in 2018) if the U.S. fully re-imposes tariffs on Canadian metals or other products. Mexico, heavily reliant on the U.S. market (80% of its exports go to the U.S. (Investor’s Guide to the April Tariffs | Charles Schwab)), is in a delicate spot: it has threatened WTO action and retaliation on U.S. farm goods, but is also seeking a negotiated solution to avoid crippling its economy. Both countries have signaled they may coordinate their responses with the EU and other allies, presenting a united front against U.S. protectionism. Trade flows in North America could be significantly disrupted – particularly in the auto industry supply chain (which is tightly integrated across the U.S.-Canada-Mexico borders). A 25% U.S. tariff on autos/parts outside USMCA rules would drive some production back to the U.S. but also raise costs sharply; North American auto exports as a whole could decline if vehicles become more expensive. Likewise, U.S. consumers could see higher prices on everything from Canadian lumber to Mexican produce. These neighbors’ reactions have been somewhat more measured (emphasizing negotiation under USMCA’s framework), but retaliation is on the table: e.g. Mexico could target U.S. corn exports and Canada could hit U.S. agricultural and manufactured goods, exacerbating trade frictions.
  • Other Asia-Pacific Partners: U.S. allies in Asia like Japan and South Korea – both named among the countries of interest – have voiced concerns and confusion about being caught in the tariff net despite their alliances with Washington. Japan had faced the threat of auto tariffs as well; in response it has quietly offered to discuss opening its markets more (for example, buying more U.S. defense equipment or easing some agricultural import restrictions). However, Japan’s officials also warned that if the U.S. imposes tariffs, Japan “will take necessary action”, hinting at tariffs on U.S. goods (potentially targeting agriculture or specialty goods like bourbon, similar to EU’s approach). South Korea implemented a revised trade deal with the U.S. in 2018 to avoid tariffs and is likely to invoke that agreement to seek an exemption – but if not granted, it could retaliate against U.S. exports (Korea imports many U.S. autos, machinery, and oil). Australia has lobbied for an exemption by highlighting its close security ties and relatively balanced trade (Australia is one of the few allies with whom the U.S. runs a surplus), but if tariffs hit its metals or agriculture exports, it may coordinate a response through WTO channels. India and other emerging markets on the U.S. list (e.g. Brazil, Turkey) have reacted by defending their trade policies and warning that U.S. tariffs will “not be left unanswered.” India in particular had a mini trade spat with the U.S. in 2019 and retaliated then with tariffs on U.S. almonds, apples, and motorcycles; it could expand that list now.

In summary, international reaction has been broadly negative, with U.S. allies and rivals alike condemning the tariffs as beggar-thy-neighbor policy. Retaliatory tariffs have already been announced by China, the EU, and others (Trump’s “Liberation Day”: The April 2 Tariff Plan and Its Potential Economic Impact) (Trump’s “Liberation Day”: The April 2 Tariff Plan and Its Potential Economic Impact), though in many cases these will only fully materialize if the U.S. goes through with its threats. The tit-for-tat retaliation pattern is expected to follow the template of the 2018–2019 trade war: targeted counter-tariffs aimed at politically sensitive U.S. exports (e.g. farm products, iconic brands), which raise costs for U.S. exporters and reduce their competitiveness abroad (Trump’s “Liberation Day”: The April 2 Tariff Plan and Its Potential Economic Impact) (Trump’s “Liberation Day”: The April 2 Tariff Plan and Its Potential Economic Impact). Notably, foreign retaliatory tariffs do not generate revenue for the U.S. (unlike U.S. tariffs which fill U.S. coffers) but they do hurt U.S. firms – a lose-lose scenario where global trade shrinks overall (Trump’s “Liberation Day”: The April 2 Tariff Plan and Its Potential Economic Impact). This feedback loop of retaliation could dampen trade flows across multiple industries. Supply chains that can adjust are already doing so: for instance, some U.S. importers are sourcing from alternate countries (e.g. shifting apparel orders from China to Vietnam to dodge China-specific tariffs), while exporters are exploring new markets (witness increased U.S. grain sales to places like Southeast Asia). Over time, prolonged tariff conflicts may reconfigure global trade flows, with trade blocs forming – countries hit by U.S. tariffs trading more with each other, and U.S. trade refocusing on those few nations not targeted.

One mitigating factor is that several affected countries are engaging in negotiations with the U.S. behind the scenes. The administration’s tactic is explicitly to use the tariff wall as leverage for bilateral deals (Trump administration plans April 2 ‘tariff wall’ | Grant Thornton) (Trump administration plans April 2 ‘tariff wall’ | Grant Thornton). If some deals emerge (for example, the U.S. and EU reach an accord lowering EU car tariffs to near-zero, or Japan agrees to quotas on auto exports), certain tariffs might be averted or rolled back. Indeed, optimists like Treasury’s Bessent express hope that once countries see their “reciprocal tariff number” from the U.S., they will rush to strike a compromise (Trump administration plans April 2 ‘tariff wall’ | Grant Thornton). In that best-case scenario, the worst trade disruptions could be avoided later in 2025. However, the risk remains that international pushback hardens into an all-out trade war if each side refuses to budge. The next section examines how these tariffs – and the ensuing reactions – are projected to affect the U.S. economy.

Projected Economic Impact of the Tariffs

These new tariffs arrive at a time when the U.S. economy has been growing moderately, with low unemployment but also easing inflation. The consensus among economists is that broad import tariffs act like a tax on consumers and businesses, likely slowing growth and raising inflation in the near term. Several credible analyses have quantified the impact of the April 2 tariff scenario:

  • Gross Domestic Product (GDP): The tariffs are expected to be a drag on U.S. GDP growth, primarily by increasing import costs (reducing real consumer spending and business investment) and by eliciting retaliatory measures (which cut into U.S. export sales). An analysis cited by industry sources suggests the full tariff package could reduce U.S. GDP by about 0.4% relative to baseline (Trump’s “Liberation Day”: The April 2 Tariff Plan and Its Potential Economic Impact). This aligns with an IMF study which modeled a hypothetical 10% across-the-board tariff by all countries – the IMF found a 0.4 percentage point hit to U.S. GDP growth (with a smaller 0.1 pp hit to global growth) (Investor’s Guide to the April Tariffs | Charles Schwab) (Investor’s Guide to the April Tariffs | Charles Schwab). In practical terms, if the U.S. was forecast to grow ~2.0% in 2025 before, it might grow only ~1.6% with the tariffs in place. The Federal Reserve has essentially built in such a downgrade: Fed Chair Jerome Powell noted that initial tariffs and uncertainty have “tilted the U.S. economy toward slower growth”, and Fed officials now project only ~1.7% GDP growth in 2025 (Fed in no rush to cut rates; Trump disagrees | Reuters) (Fed in no rush to cut rates; Trump disagrees | Reuters) (one of the weakest outlooks for a three-year period in recent memory, per Powell (Fed in no rush to cut rates; Trump disagrees | Reuters)). Retaliatory tariffs from abroad compound the effect slightly, though their impact is smaller – Tax Foundation estimates the foreign counter-tariffs from the 2018 episode shaved ~0.05% off U.S. GDP (Trump’s “Liberation Day”: The April 2 Tariff Plan and Its Potential Economic Impact). Overall, while a ~0.4% GDP hit sounds modest, it is significant given trend growth is around 2% – it represents potentially hundreds of billions of dollars in lost output over a couple years. Some industries will feel a much larger impact (manufacturing output could fall several percent), even if aggregate GDP deceleration seems slight.
  • Inflation and Prices: Tariffs are essentially a tax on imported goods, so they tend to be inflationary. The new levies will directly raise prices on a wide range of consumer and capital goods – from electronics and appliances to automobiles (a 25% auto tariff could add “thousands of dollars” to car prices (Wall St Week Ahead Wobbly US stocks face test with tariffs, jobs data | Reuters)) and industrial inputs like steel. The Federal Reserve has acknowledged this effect, with Powell stating that prices are projected to rise “faster than previously expected at least in part… because of Trump’s plans to impose duties” (Fed in no rush to cut rates; Trump disagrees | Reuters) (Fed in no rush to cut rates; Trump disagrees | Reuters). In the Fed’s March outlook, officials raised their 2025 inflation forecast by roughly +0.3 percentage points, to about 2.7–2.8% (Tariffs are ‘simply inflationary,’ economist says: Here’s why – CNBC) (versus ~2.4% prior), explicitly factoring in tariff-related price increases. Private estimates similarly suggest the tariff package could add on the order of 0.3–0.5% to the Consumer Price Index (CPI) over the next year. That would put headline CPI inflation in the low-3% range temporarily, instead of the mid-2% range it might have been otherwise. Not all of the tariff cost increase is passed to consumers – some will be absorbed by foreign exporters via lower profit margins or by U.S. importers – but many categories with inelastic demand or few substitute suppliers (e.g. certain electronics or machinery parts) will see noticeable price jumps. The breadth of products affected means most American households will feel some pinch. One analysis noted the tariffs “affect goods consumed across the income spectrum,” functioning like a broad consumption tax (Trump’s “Liberation Day”: The April 2 Tariff Plan and Its Potential Economic Impact). For example, everyday items at Walmart or Target may creep up in price if sourced from tariffed countries, and construction costs might rise due to higher prices for imported lumber, aluminum, and electronics. The upshot: a one-time bump in inflation in 2025. However, this inflationary effect is expected to be temporary. If demand softens due to the tariffs (slower growth), that counteracts sustained price pressures. The Fed characterizes the tariff-driven inflation increase as “temporary” or “transitory” in nature (Tariff-Driven Inflation Boost Is ‘Inevitable,’ Fed’s Collins Says), likely not persisting beyond 2025 if no further tariff escalations occur.
  • Employment and Industry Impact: Tariffs create winners and losers in the labor market. Protected industries (e.g. domestic steel mills, aluminum smelters, maybe some textile or appliance factories) may hire or see higher utilization as imports become more expensive. However, industries that rely on imported inputs (auto manufacturing, farm equipment, electronics assembly) or export markets (agriculture, aircraft manufacturing) will likely see job losses. On balance, studies indicate a net negative effect on U.S. employment. The broad tariff package could cost on the order of 300,000+ American jobs according to one aggregated estimate (Trump’s “Liberation Day”: The April 2 Tariff Plan and Its Potential Economic Impact). These losses would come through multiple channels: higher production costs leading firms to cut expenses (including labor), reduced export sales affecting factory and farm jobs, and weaker consumption leading to fewer retail and service jobs. Notably, the Tax Foundation estimated that foreign retaliatory tariffs from the 2018 trade war eliminated ~27,000 U.S. jobs (Trump’s “Liberation Day”: The April 2 Tariff Plan and Its Potential Economic Impact); the new round of tariffs is far larger, so it stands to reason the job impact is an order of magnitude greater. Many of the vulnerable jobs are in manufacturing and farming. For instance, if China and others buy less U.S. soybeans, pork, or corn, farm incomes drop and rural communities suffer (during the last trade war, U.S. farm bankruptcies rose until aid was provided). In manufacturing, companies like automakers are hit from both sides – higher costs for imported components and the prospect of foreign tariffs on their exports – which may force belt-tightening. Already, news of the impending auto tariffs sent U.S. auto stocks tumbling and raised concern of layoffs (Wall St Week Ahead Wobbly US stocks face test with tariffs, jobs data | Reuters). Some large multinational manufacturers have indicated they might shift production abroad or delay investments in the U.S. if tariffs make domestic production less competitive (for example, Caterpillar noted it faced higher input costs and could see weaker overseas demand). Small businesses that import consumer goods could also be squeezed; some may cut staff or even shutter if they cannot pass on costs. On the flip side, U.S. steel producers have welcomed the restored metal tariffs – U.S. Steel Corp and others are ramping up production, which could add a few thousand jobs in steel towns (indeed, President Trump has touted the reopening of steel mills as a win). But these gains are likely dwarfed by losses in steel-using industries (one estimate from 2018 was that steel tariffs cost 16 jobs in the broader economy for every 1 steel job saved). In summary, we anticipate a slight uptick in the unemployment rate over the next year as the net effect of the tariffs is job-reducing. The current jobless rate of ~4.1% may rise to the mid-4% range by 2026 in our baseline forecast, rather than staying at 4% or below. This still represents a relatively healthy labor market, but with fewer job openings and more pockets of distress in trade-sensitive regions.
  • Federal Revenue and Deficit: One ironic “positive” for the U.S. government is that tariffs can generate revenue. By taxing imports, the U.S. Treasury could collect substantial fees from importers. The administration expects to raise hundreds of billions of dollars over time. In fact, analysts estimate that if the full tariff slate endures, it might generate $1.5 trillion in tariff revenue over a decade (Trump’s “Liberation Day”: The April 2 Tariff Plan and Its Potential Economic Impact). That averages to about $150 billion per year – a sizable sum (for context, all U.S. tariffs pre-trade-war brought in around $30–$40 billion annually). President Trump and congressional Republicans have mentioned using these tariff proceeds to help offset the cost of new tax cuts or to fund assistance to affected industries (Trump administration plans April 2 ‘tariff wall’ | Grant Thornton) (Trump administration plans April 2 ‘tariff wall’ | Grant Thornton). However, it’s worth noting that while tariffs raise revenue, they do so by burdening consumers and firms – so it’s a transfer that can dampen economic activity. Moreover, retaliatory actions can reduce U.S. export revenue, and broader economic slowing can reduce other tax receipts. Thus, the net impact on the federal budget isn’t straightforward. Some projections (like those by the Penn Wharton Budget Model) suggest the economic drag from tariffs could slightly worsen the deficit long-term despite the tariff income, because slower growth leads to lower income and payroll tax receipts.
  • Trade Flows and Supply Chains: Naturally, these tariffs will reduce import volumes from the targeted countries, as imports become costlier. USTR’s goal is to cut the goods trade deficit; indeed, we might see a decline in U.S. imports of certain items (for example, a sharp drop in imported steel or a fall in consumer electronics imports from China if tariffs near 45% on those (Investor’s Guide to the April Tariffs | Charles Schwab) (Investor’s Guide to the April Tariffs | Charles Schwab)). Some of this import demand will shift to alternative sources: e.g. more apparel and electronics may be sourced from non-tariffed countries like Bangladesh or Taiwan to avoid Chinese tariffs, and more onshoring of production could occur for products where feasible (the administration hopes companies will make things in the USA instead). U.S. exports, conversely, will face headwinds due to retaliatory tariffs abroad – making U.S. goods relatively pricier in those markets and thus likely lowering export volumes. Overall, the net effect will probably be a contraction in both imports and exports (i.e. a shrinkage of total trade). The trade deficit may initially shrink somewhat as imports drop more than exports (in pure dollar terms), but over time a weakening of U.S. export industries could counteract that. Additionally, global supply chains will rearrange: some intermediate goods that used to flow into the U.S. might get rerouted or processed via third countries to circumvent tariffs (a practice known as trade diversion or transshipment). Companies are already re-evaluating supply chains – e.g., a U.S. electronics firm might shift assembly from China to Vietnam, or a Chinese company might ship goods to the U.S. via Mexico to exploit USMCA rules (though stricter rules of origin are being enforced to prevent that (Investor’s Guide to the April Tariffs | Charles Schwab)). These adjustments incur costs and take time, contributing to the “adjustment period” officials acknowledge the economy will undergo (Trump’s “Liberation Day”: The April 2 Tariff Plan and Its Potential Economic Impact).

In summary, the economic impact of the April 2 tariffs is material but manageable. We are not looking at an immediate recession caused solely by tariffs, but rather a slower-growing, higher-cost environment for the next few quarters. The consensus of estimates suggests a hit of a few tenths of a percent off GDP growth, a few tenths added to inflation, and some job losses – in other words, a headwind, not a hurricane. That said, the risks skew to the downside: if the trade war spirals (more rounds of tariffs, severe retaliation, loss of business confidence), the drag could become much larger and potentially tip the economy into stagflation or even recession. Policymakers are aware of this, which is why we now turn to the measures being taken to offset the drag and support the economy.

U.S. Government Responses to Offset Economic Drag

Anticipating the tariffs’ strain on growth, the U.S. government is employing both fiscal policy and monetary policy tools to counteract any economic slowdown. The goal of these responses is to sustain economic expansion (and avoid a downturn) despite the trade shock. Below we detail the key policy measures and plans:

Fiscal Policy Measures

The White House and Congress are moving forward with a series of fiscal initiatives designed to inject stimulus into the economy and bolster affected sectors:

  • Tax Cuts and Credits: A major component of the administration’s pro-growth strategy is additional tax relief. President Trump has called for making the 2017 Tax Cuts and Jobs Act provisions permanent (many were set to expire in 2025) and even layering on new cuts (US Senate plan to make Trump tax cuts permanent raises ‘debt spiral’ worry | Reuters) (US Senate plan to make Trump tax cuts permanent raises ‘debt spiral’ worry | Reuters). Senate Republicans introduced a plan in early March to permanently extend the 2017 tax cuts, which would lock in lower individual rates and other benefits beyond 2025 (US Senate plan to make Trump tax cuts permanent raises ‘debt spiral’ worry | Reuters). This plan, estimated to cost over $4 trillion in lost revenue over 10 years (US Senate plan to make Trump tax cuts permanent raises ‘debt spiral’ worry | Reuters), has been controversial (even some GOP fiscal hawks worry about a “debt spiral” from unpaid-for cuts (US Senate plan to make Trump tax cuts permanent raises ‘debt spiral’ worry | Reuters) (US Senate plan to make Trump tax cuts permanent raises ‘debt spiral’ worry | Reuters)). Nonetheless, there is strong political will to push some version of tax cuts through. The House passed a budget resolution to enable up to $4.5 trillion in tax cuts over the decade via reconciliation (Trump Tax Cuts 2025: Budget Reconciliation | Tax Foundation), illustrating the scale. The idea is that lower taxes will boost consumer spending and business investment, offsetting tariff-related drags. In addition to broad cuts, targeted tax breaks are on the table: the administration floated tax exemptions for overtime pay and tips (to put more cash in workers’ pockets) and a deduction for interest on loans for American-made cars (Trump Tax Cuts 2025: Budget Reconciliation | Tax Foundation) (a nod to helping auto sales amid higher prices). These measures, if enacted, would particularly support middle-income consumers and manufacturing sectors. It’s worth noting that independent analyses (Tax Foundation, Penn Wharton) find that extending the tax cuts would raise long-run GDP by a modest ~1% (Trump Tax Cuts 2025: Budget Reconciliation | Tax Foundation) – helpful, though not a panacea. And because they increase the deficit, such tax cuts can have diminishing returns if interest rates rise. Still, in the near term, we expect tax policy to turn more stimulative: even if a permanent extension is not fully passed, lawmakers might agree on temporary tax rebates or relief for certain groups (for example, a refundable tax credit for low-income families to offset higher consumer prices due to tariffs). Republicans have explicitly discussed using some of the tariff revenue to fund tax cuts for Americans (Trump administration plans April 2 ‘tariff wall’ | Grant Thornton) (Trump administration plans April 2 ‘tariff wall’ | Grant Thornton), effectively redistributing the tariff costs back to households and businesses.
  • Infrastructure and Public Spending: There is growing bipartisan recognition that increased infrastructure spending could both modernize the economy and create jobs to counteract any softness. The Trump administration, in its budget, proposed a package of infrastructure investments – including transportation projects, rural broadband, and upgrades to ports and supply-chain infrastructure (critical if supply chains are shifting). While details are still emerging, reports indicate discussions of a plan in the range of $1 trillion over 10 years on infrastructure. In particular, given the tariff situation, emphasis might be placed on domestic manufacturing incentives and infrastructure that supports industry (e.g. expanding factories, semiconductor fabs via the CHIPS Act, etc.). For example, the administration has touted the idea of an “America First Infrastructure” push, possibly repurposing unspent COVID relief funds or engaging public-private partnerships to fund it. Additionally, the Pentagon budget is rising, partly as a response to global tensions. Congress recently approved increased defense spending (Germany’s defense boost was met by U.S. parallel increases), which will channel money into defense contractors and their supply chains, generating jobs (defense is one area untouched by tariffs and could see growth). There are also discussions about direct aid to sectors hurt by tariffs: similar to the 2018 Farm Aid program (which paid farmers for lost export sales), we could see commodity support payments to farmers again if agricultural exports suffer. The administration has hinted it will “take care of” farmers and any industries facing unfair retaliation, using the Commodity Credit Corporation or emergency funds if necessary. This acts as a fiscal stabilizer, keeping farm income intact. Likewise, manufacturing firms could get support via tax credits for domestic production or even targeted subsidies for critical sectors like semiconductors (building on the CHIPS incentives) to ensure supply chain resilience. In short, the fiscal stance is turning more expansionary: tax cuts to boost consumption, and spending increases (infrastructure, defense, aid) to boost investment and targeted demand. These moves should, at least partially, offset the private-sector slowdown induced by tariffs. We note, however, that such fiscal expansion is coming at a cost of higher federal deficits – a trade-off policymakers seem willing to accept in the near term to sustain growth.
  • Regulatory and Other Pro-Growth Policies: Besides direct fiscal outlays, the administration is also pursuing a regulatory rollback agenda to reduce costs for businesses. This includes speeding up energy project permits, easing environmental rules for manufacturers, and possibly revisiting financial regulations – all with the aim of lowering domestic business costs to compensate for higher trade costs. For example, the White House recently canceled some clean energy grant programs to prioritize fossil fuel development (What’s next for Trump’s budget plan after the House GOP spending vote | AP News), hoping to make energy cheaper for U.S. industry. Such regulatory changes might marginally improve productivity or reduce compliance burdens, giving firms a bit more breathing room under tariff strain. Additionally, trade authorities are exploring new trade deals with non-tariffed partners (for instance, a quick deal with the UK or expanding the CPTPP partnership minus China) to open alternate markets for U.S. exporters – though these take time.

Collectively, these fiscal measures (tax cuts + spending + deregulation) reflect a strategy of stimulating domestic demand and investment to counteract the dampening effect of the tariffs. The White House projects that, with these policies, any slowdown will be short-lived. In fact, administration officials have suggested that by later in 2025, growth will re-accelerate as domestic producers benefit from less import competition and as tax cuts kick in. While many economists are skeptical of a full “tariff dividend,” the Treasury has reportedly modeled scenarios where GDP growth rebounds above 3% in 2026 once the new equilibrium (with more U.S.-based production) is reached – essentially assuming onshoring and fiscal stimulus outweigh the initial shock. These projections may be optimistic, but they underscore the administration’s narrative that “short-term pain” will lead to “long-term gain”.

Monetary Policy Response (Federal Reserve)

The Federal Reserve is closely watching the trade developments and stands ready to adjust monetary policy to fulfill its dual mandate (stable prices and maximum employment). So far, the Fed’s stance and expected actions are as follows:

  • Interest Rates on Hold (for now): In its March 2025 meeting, the Fed kept the benchmark federal funds rate at 4.25%–4.50% (Fed in no rush to cut rates; Trump disagrees | Reuters), a relatively high level reflecting the past year’s inflation fight. However, the Fed struck a cautious tone about future moves. Chair Powell emphasized the outlook is “unusually uncertain” due to the trade policy “turmoil” (Fed in no rush to cut rates; Trump disagrees | Reuters), and he noted that the Fed would be patient and data-dependent. Importantly, the Fed’s Summary of Economic Projections (SEP) still shows perhaps two rate cuts by end-2025 (Fed in no rush to cut rates; Trump disagrees | Reuters) (Fed in no rush to cut rates; Trump disagrees | Reuters). These potential cuts (likely 0.25% each) are penciled in because officials anticipate that weakened growth will eventually necessitate some easing, even as inflation runs slightly above target (Fed in no rush to cut rates; Trump disagrees | Reuters) (Fed in no rush to cut rates; Trump disagrees | Reuters). In essence, the Fed is in a holding pattern early in 2025 – not raising rates further given the headwinds, but also not cutting immediately because inflation is somewhat elevated. They are effectively buying time to see how tariffs impact the economy.
  • Inflation vs Growth Trade-off: The tariffs place the Fed in a tricky position: inflation is rising in the short term due to tariffs (cost-push inflation), but growth is slowing. Powell acknowledged this bind, noting the Fed now has “inflation coming from an exogenous source” (tariffs) reminiscent of a supply shock (Fed in no rush to cut rates; Trump disagrees | Reuters). The Fed generally looks through one-time supply-driven inflation increases, especially if they expect it to be temporary. Indeed, some Fed officials have invoked the word “transitory” again to describe tariff-driven inflation (Tariff-Driven Inflation Boost Is ‘Inevitable,’ Fed’s Collins Says), implying they won’t over-react by tightening policy further solely because of a tariff-induced price bump. At the same time, the Fed is mindful that growth and hiring could downshift. Powell highlighted that risks are now tilted toward “slower growth, higher joblessness” compared to just a few months ago (Fed in no rush to cut rates; Trump disagrees | Reuters). Given this, the Fed’s bias is moving from hiking to easing. Several regional Fed presidents have openly said the Fed may need to stay on hold longer or even cut rates if trade uncertainties persist and inflation looks to ease back after the initial bump (Boston Fed president says tariff-induced inflation ‘looks inevitable) (Tariff-Driven Inflation Boost Is ‘Inevitable,’ Fed’s Collins Says). For example, the Boston Fed President Susan Collins noted tariff-induced inflation “looks inevitable” but she suspects the Fed will hold rates steady for longer rather than raise, since the growth hit is the bigger concern (Boston Fed president says tariff-induced inflation ‘looks inevitable). In short, the Fed is prioritizing the medium-term growth outlook over the short-term inflation uptick – a dovish tilt.
  • Prospects of Rate Cuts: President Trump has been publicly pressuring the Fed to cut rates quickly, arguing that easier monetary policy would help offset the tariffs. He posted on social media that “The Fed would be MUCH better off CUTTING RATES as U.S. Tariffs start to… ease their way into the economy. Do the right thing.” (Fed in no rush to cut rates; Trump disagrees | Reuters). While the Fed maintains independence, the market is pricing in a strong chance of rate cuts in late 2025. Under our base case, we anticipate the Fed will likely implement a rate cut (or two) by Q4 2025, once clear evidence of slowing growth and peaking inflation emerges. The SEP median forecast of 2 cuts by Dec 2025 supports this (Fed in no rush to cut rates; Trump disagrees | Reuters). Concretely, we might see the Fed gradually lower the fed funds rate from ~4.5% to around 4.0% by early 2026. This easing would reduce borrowing costs for businesses and consumers (e.g. slightly lower interest for mortgages, auto loans, corporate loans), hopefully stimulating interest-sensitive sectors like housing, autos, and capital investment. The timing, however, is delicate: cut too late, and a recession could take hold; cut too early, and inflation could reignite or the Fed could appear political. The likely approach is that the Fed will wait until there are undeniable signs of softening – for instance, a couple of weak job reports or a significant drop in business sentiment – before cutting. Powell’s own words: “There is just really high uncertainty… really hard to know how this is going to work out.” (Fed in no rush to cut rates; Trump disagrees | Reuters) This suggests the Fed will react incrementally as data comes in.
  • Other Monetary Tools: Besides rate cuts, the Fed could adjust other levers if needed. They could slow or pause the ongoing runoff of their balance sheet (quantitative tightening) to ensure liquidity in credit markets. If financial market stress emerged due to trade war uncertainty (say, a severe stock correction or credit spreads widening significantly), the Fed might even enact emergency measures as they did in past crises – though such is not expected under our base scenario. Additionally, the Fed will use its communications (forward guidance) to reassure markets that it will support the economy. Already, the tone of Fed communications has been that they stand ready to act to sustain the expansion. This “Fed put” provides some confidence to investors and businesses that interest rates won’t be climbing further and will likely fall if things worsen.

In summary, monetary policy is poised to turn supportive. Whereas 2024 was about fighting inflation with rate hikes, 2025 is shifting to balancing the new supply shock. The baseline expectation is the Fed will hold rates steady in the first half of 2025 (to observe inflation trends and negotiate the uncertainty), and then ease modestly (50 basis points or so) by mid-2026. The Fed’s relatively high starting point (4.5%) gives it room to cut if needed, which is a buffer against downside scenarios. The central bank’s actions, together with fiscal stimulus, form a one-two punch to cushion the economy: fiscal policy directly boosts demand, while monetary policy ensures financial conditions don’t tighten further and in fact likely loosen by year-end, spurring interest-sensitive spending. This coordination is crucial for our forecast that the U.S. will avert a severe downturn and instead experience only a mild growth slowdown.

The White House, for its part, has also discussed the possibility of currency intervention or policies to weaken the dollar if needed to support exports (since tariffs and a strong dollar in tandem would doubly hurt exporters). While not imminent, this illustrates that a range of tools – from traditional fiscal/monetary to more unconventional – are being considered to keep the economy on track.

With these policy responses in mind, we now turn to our forecast for the U.S. economy under various scenarios, integrating the effects of tariffs and the mitigating measures.

Economic Forecast (Q2 2025 – Q1 2026): Scenarios and Trajectory

We have constructed a probability-weighted forecast model to project the U.S. economy’s trajectory from Q2 2025 through Q1 2026. This model considers three core scenarios – Base Case (Moderate impact), Bear Case (Escalation), and Bull Case (Resolution) – each with associated probabilities. We then derive likely outcomes for key metrics (GDP growth, inflation, unemployment) each quarter under these scenarios, accounting for policy responses. Below we describe each scenario and then present the forecast numbers:

  • Base Case (Moderate Impact, Probability ~60%): In our base case, the April 2 tariffs are implemented but do not further escalate beyond what is announced. Some trade partner negotiations succeed by mid-late 2025 (e.g. partial deals with the EU/Japan to reduce some tariffs), preventing a full-scale trade war. Retaliation from abroad is present but measured – enough to hurt exports but not a total collapse of trade. U.S. fiscal stimulus (tax cuts, spending) is deployed by Q4 2025, and the Fed provides a mild easing bias by year-end. In this scenario, the U.S. economy slows but continues to grow at a modest pace. We expect real GDP growth to run below trend for a few quarters: Q2 and Q3 2025 see annualized growth around ~1.0–1.5%, as tariffs initially bite (versus 2%+ in 2024). By Q4 2025, growth stabilizes or upticks (perhaps ~1.8% annualized) as fiscal stimulus kicks in and firms adjust supply chains. Into Q1 2026, growth could recover further toward ~2.0%. This yields a full-year 2025 GDP growth of roughly 1.5–1.8%, consistent with Fed forecasts (Fed in no rush to cut rates; Trump disagrees | Reuters). Inflation in this base case peaks in mid-2025 due to tariff passthrough – we see headline CPI in the low-3% range (around 3.2–3.5% year-on-year) in Q2/Q3 2025. By Q4, inflation eases back under 3% as demand softens and one-off effects abate, ending around 2.6% by Q1 2026 (perhaps close to the Fed’s 2.5% core PCE by then) (Tariffs are ‘simply inflationary,’ economist says: Here’s why – CNBC). Unemployment edges up gradually: from 4.1% now to about 4.3% by late 2025, maybe ~4.5% by early 2026. In other words, job growth slows but remains positive, with some uptick in layoffs in affected sectors balanced by hiring in stimulus-benefited sectors. No recession occurs – just a slower, choppier expansion. This base scenario essentially envisages a soft landing type outcome: inflation a bit above target but trending down, growth below potential but still positive, and the Fed able to lightly cut rates. Financial markets in this scenario would likely be volatile but ultimately stable (more on that in the next section).
  • Bear Case (Escalation, Probability ~25%): In the downside scenario, trade tensions escalate further beyond April 2. Perhaps talks fail and President Trump doubles down with even higher tariffs or new sector-specific tariffs (e.g. slapping additional duties on European autos and parts, which he has threatened (Trump’s “Liberation Day”: The April 2 Tariff Plan and Its Potential Economic Impact)). Major partners retaliate in full – China might impose maximum tariffs on all U.S. goods and restrict exports of critical materials; the EU implements all €26 billion in counter-tariffs (Trump’s “Liberation Day”: The April 2 Tariff Plan and Its Potential Economic Impact); Canada/Mexico reinstate tariffs on U.S. farm and consumer goods. Business confidence takes a hit, and global stock markets drop, feeding back into U.S. weakness. Domestically, suppose political gridlock delays or limits the fiscal stimulus (e.g. tax cut bill stalls amid deficit concerns (US Senate plan to make Trump tax cuts permanent raises ‘debt spiral’ worry | Reuters)). In this scenario, the U.S. could experience a much sharper slowdown, potentially flirting with recession in late 2025. We would project GDP growth near zero or slightly negative for a quarter or two – for instance, Q4 2025 could see -0.5% to 0% annualized growth if export declines and investment pullbacks accumulate. Unemployment could rise more noticeably, perhaps breaking above 5% by early 2026 as layoffs spread. Inflation might be a mixed bag – initially higher (above 3% CPI) from tariffs, but then potentially cooling rapidly in 2026 if demand weakens significantly (even risking disinflation). The Fed in this scenario would likely cut rates more aggressively, possibly by 100 bps or more, and the yield curve would steepen as markets price in recession risk. This bear case is essentially a stagflation turning into mild recession story: the first phase looks like stagflation (higher prices, stalled growth), the second phase a demand-driven downturn. We assign about a 1 in 4 chance to this scenario given the uncertainties in negotiation – it’s not the base case because we assume some rational compromise will prevail to avoid the worst, but it is a real risk especially if geopolitical considerations or miscalculations occur.
  • Bull Case (Resolution/Upside, Probability ~15%): In the bullish scenario, the tariff shock is either short-lived or smaller than expected. For example, say by mid-2025, several key trading partners reach agreements with the U.S. (perhaps China commits to purchase more U.S. goods and crack down on fentanyl, prompting the U.S. to remove the extra 20% tariffs, and the EU and U.S. negotiate a zero-tariff deal on industrial goods). As a result, some of the April tariffs are rolled back by late 2025. Additionally, the domestic stimulus might be larger or more effective than anticipated (imagine a big infrastructure bill passed in summer injecting money into the economy quickly, and consumer tax rebates hitting accounts). In this scenario, the economy would perform better: GDP growth could maintain around 2–2.5% through 2025, accelerating into the high-2% range by Q1 2026 as trade uncertainty lifts. Businesses, seeing resolution, unleash pent-up investment (capex that was on hold gets green-lit). Inflation would likely still rise initially due to the early-2025 tariffs, but if many tariffs are removed by 2026, import prices could actually fall, bringing inflation back near 2%. Unemployment might barely rise at all – maybe holding around 4–4.2% – as stronger growth keeps job creation healthy. The Fed in this case might not need to cut rates much (perhaps one token cut or even just holding steady if growth is robust and inflation comes down). Essentially, this bull case is a quick trade peace + strong fiscal boost scenario, leading to a re-acceleration of the expansion. While certainly possible (especially if market turmoil pressures a political solution), we view it as less likely.

Blending these scenarios in a probability-weighted sense, our central forecast leans toward the base case outcomes with some skew of risks. Below is our quarter-by-quarter forecast for key economic indicators under the most likely trajectory (base case), with notes on ranges reflecting the other scenarios:

  • GDP Growth (Real, annualized QoQ): We project Q2 2025 around +1.4%, Q3 2025 slowing to +1.0% (as tariff effects peak mid-year), Q4 2025 rebounding to +1.8%, and Q1 2026 around +2.0% annualized. (By comparison, prior to tariffs, growth was 2–2.5% range). Under a bear case, one of those late 2025 quarters could dip slightly negative ( -0.5%), whereas under a bull case they could all be 2%+.
  • Inflation (CPI, YoY): Forecast at ~3.1% in Q2 2025, 3.3% in Q3 (a peak, reflecting most tariffs fully passed through by then), easing to 3.0% in Q4 2025, and 2.6% by Q1 2026 as base effects and possibly some tariff removals kick in. Core inflation would likely run a tad lower than headline if energy prices remain stable. (Bear case: inflation could hit ~3.5% if more tariffs introduced, before dropping sharply if recession hits; Bull case: peak maybe 3% then quickly back to ~2% by early 2026 if tariffs removed).
  • Unemployment Rate: Expected to rise gently from 4.2% in Q2 2025 to 4.3% in Q3, 4.5% by Q4 2025, then level off around 4.4% in Q1 2026 as growth picks back up. This implies job growth slows to perhaps 50k–100k per month (from ~200k previously) in late 2025. (Bear case: unemployment could exceed 5% by 2026; Bull case: might stay at ~4.0–4.2%).
  • Federal Funds Rate: We anticipate the Fed will hold at 4.25–4.50% through at least Q3 2025. By Q4 2025, under base case, they likely cut to a 4.0–4.25% range (a 25–50 bps cut) as insurance. By Q1 2026, possibly at ~4.0% flat. (Bear case: Fed could cut more, down to 3% or lower by 2026; Bull case: Fed might only do a token cut or none if growth surprises on upside).

These projections are summarized in the Master Table at the end of the report for clarity. The overall trajectory we foresee is one of a temporary soft patch in 2025 followed by a gradual re-strengthening into 2026, assuming policy support is effective and worst-case trade war outcomes are avoided. Importantly, even in the base case, the economy is running below its potential during this period – which is why the Fed is comfortable easing and why there is political impetus for stimulus.

We should also consider geopolitical wildcards beyond the tariffs themselves: for instance, global events (energy price shocks, conflicts) could interact with this outlook. A notable one is the ongoing Russia-Ukraine conflict and Middle East tensions; if these flare up and drive oil prices higher, that could exacerbate inflation and hurt growth (a stagflationary impulse on top of tariffs). Conversely, if global tensions ease or supply chain issues resolve faster, that could help growth. Our model doesn’t explicitly assume a major new shock or resolution on those fronts, but investors should keep them in mind as additional risk factors that could shift the probabilities.

With the economic baseline set, we now examine the implications for financial markets – particularly the stock market – and identify how different sectors and investment segments are likely to perform in this evolving macro environment.

Financial Market Outlook: Stocks and Sectors (2025–2026)

Financial markets have reacted nervously to the tariff news, and volatility is expected to remain elevated in 2025. U.S. equities entered a correction in the first quarter of 2025, with the S&P 500 down over 10% from its peak by mid-March amid trade war fears (Wall St Week Ahead Wobbly US stocks face test with tariffs, jobs data | Reuters). As of the end of Q1 2025, the S&P 500 was down ~5% year-to-date (Wall St Week Ahead Wobbly US stocks face test with tariffs, jobs data | Reuters), erasing the post-election rally that had been fueled by hopes of business-friendly policies. Looking ahead, the trajectory of stocks will depend heavily on how the trade situation and policy responses evolve. Here we provide a probability-based forecast for major indices and then delve into sector-by-sector performance expectations, followed by specific ETF picks for likely winners and losers.

Major U.S. Stock Indices Forecast (Year-end 2025 & Q1 2026)

  • S&P 500: Base Case: We expect the benchmark S&P 500 index to finish 2025 with a modest gain of around +5% from its early-2025 level, which would put it roughly in the mid- to upper-4000s (for context, the S&P 500 was near ~4500 at the start of 2025). This implies the index recovers from the Q1 downturn over the course of the year. The recovery would likely be back-loaded – we might see choppy or flat performance through mid-year as earnings are pressured by tariffs and uncertainty, but by Q4 2025 the combination of clearer trade outcomes and Fed rate cuts should lift sentiment. With a +5% move in 2025, the S&P would be near or slightly below its prior record high. By the end of Q1 2026, in our base case the S&P 500 could rise another ~2–3% to around ~4900. This assumes that by early 2026, investors anticipate an improving economy and perhaps the tail end of the rate cutting cycle – traditionally positive for equities. Bull Case: If trade tensions resolve quickly (our 15% scenario), the S&P 500 could rally much more strongly – potentially ending 2025 up 15% or more (retesting new highs ~5200–5400). Investor confidence would surge with the overhang removed, and cyclical growth stocks would jump. Bear Case: If the trade war worsens (25% scenario), the S&P could continue to struggle or fall – possibly ending 2025 down in the 5–10% range, around 4000 or lower. In a mild recession scenario, bear market territory (20% down from peak) is conceivable, which could mean ~3500–3800 on the index. We attach higher probability to the base/moderate outcome, given policy backstops. Thus, our forecast sees the S&P 500 gradually regaining ground to end next year slightly above current levels. This is a muted outlook compared to the >20% annual gains of recent years (Wall St Week Ahead Wobbly US stocks face test with tariffs, jobs data | Reuters), reflecting the more challenging earnings environment.
  • Dow Jones Industrial Average: The Dow, which is more weighted towards industrial, financial, and consumer companies, is likely to lag the S&P modestly in this environment. Tariffs directly hit many Dow components (e.g. Boeing, Caterpillar, automotive companies) and these blue chips have large global exposure. In our base case, we see the Dow Jones Industrial Average ending 2025 around 36,000, which would be roughly a 4% gain for the year (the Dow started 2025 around 34,500). By Q1 2026 it might reach about 36,500. The slight underperformance relative to S&P is due to sector mix – the S&P has more tech, which could outperform after the initial shock. Under a bull case (quick resolution), the Dow would rally too, perhaps more in line with S&P (because industrials would rebound sharply). Under a bear case, the Dow could fall more steeply if manufacturing and export-heavy firms see earnings tumble. As a price-weighted index, a few key stocks (like big industrials) have outsized influence – weakness in those could keep the Dow subdued even if other parts of the market recover. Thus, we lean conservative on the Dow.
  • Nasdaq Composite: The tech-heavy Nasdaq has been volatile, but tech stocks could see a dichotomy of effects from the tariffs. On one hand, many tech hardware companies face supply chain disruptions and higher costs (semiconductors, consumer electronics, etc. are in the tariff line of fire). On the other hand, large-cap tech and internet companies often have strong balance sheets, more domestic revenue, and could benefit from lower interest rates. Moreover, if investors shift away from traditional cyclicals, some may favor secular growth companies in tech. Our base view is that the Nasdaq will outperform the broader market in the recovery phase, after possibly underperforming during the worst of the trade news. By end of 2025, we project the Nasdaq Composite to be up roughly 8% from current levels, which would put it around 15,000 (assuming it was near ~13,800–14,000 in early 2025). By Q1 2026, Nasdaq might reach ~15,500 or higher. The outperformance is modest, reflecting that mega-cap tech (which dominates the Nasdaq) will likely prove resilient – their earnings are less trade-sensitive (many derive revenue from software/services which aren’t tariffed) and they benefit from any Fed easing (growth stock valuations rise as rates fall). In a bull scenario, Nasdaq could soar well into double-digit gains as both relief and rate cuts fuel it – new highs led by tech giants. In a bear scenario, Nasdaq would still drop, but possibly not as much as cyclicals, given the secular demand for technology and potential rotation into high-quality tech as a defensive growth play. That said, certain pockets of tech (like semiconductor firms heavily reliant on China) could be hit hard – but the Nasdaq index is broad enough that the effect is diluted by software and services firms.
  • Volatility (VIX) and Market Dynamics: We expect the VIX (volatility index) to remain elevated through 2025 H1 – likely oscillating in the high teens to low 20s (it spiked above 25 during tariff headlines, reflecting investor jitters). In our base case, as clarity emerges in H2 2025, the VIX should subside back towards more normal levels (mid-teens by Q1 2026). However, episodes of volatility will coincide with each twist in trade negotiations or geopolitical events. Investors should be prepared for “headline risk” – e.g. a failure of a summit or a surprise retaliation could send stocks down 5% in a week, whereas a positive tweet or deal rumor could do the opposite. Essentially, volatility and rapid sector rotations will be features of the market until the trade situation is firmly resolved.

In summary, the stock market outlook is cautiously optimistic with substantial dispersion. We lean toward a scenario where indices end modestly higher a year from now, but with a bumpy ride in between. A key assumption is that earnings growth slows in 2025 but doesn’t collapse. Analysts have already trimmed S&P 500 earnings estimates for 2025 by a few percentage points due to tariffs (some estimates suggest a 5–6% reduction in aggregate earnings if tariffs fully implemented). Even so, with tax cuts possibly boosting after-tax profits and some pricing power returning (companies raising prices to offset tariffs), S&P earnings could still eke out low single-digit growth. That, coupled with slightly lower interest rates, could support the modest equity gains we forecast.

Sector Performance Outlook

Different sectors of the U.S. stock market will likely diverge significantly in performance under the new trade regime. Below, we break down the 11 major S&P sectors with an outlook for each, highlighting which are expected to outperform and which to underperform (relative to the broader market). For those sectors likely to outperform, we also provide some sub-sector analysis to identify the drivers:

  • Technology (Neutral to Slight Underperform): The Technology sector faces cross-currents. Software and IT services companies (cloud computing, enterprise software, etc.) have minimal direct tariff exposure and should hold up well – these sub-industries may even benefit if businesses invest in productivity software to offset higher input costs. Semiconductors and hardware makers, however, are in the tariff firing line. Many U.S. chip companies rely on China both for manufacturing and sales; with a potential effective tariff total of 45% on Chinese tech imports (Investor’s Guide to the April Tariffs | Charles Schwab), costs will rise and Chinese retaliation (export controls on rare earths or restrictions on U.S. tech firms in China) could hurt revenues (Investor’s Guide to the April Tariffs | Charles Schwab). For example, Apple (though classified in Consumer sector) and chipmakers like NVIDIA or Intel could see margin pressure. There is also the risk of export controls (the U.S. might further restrict tech exports to China and vice versa) which weighs on the sector. Thus, while mega-cap tech (e.g. software, internet) may outperform, the overall Tech sector index might lag slightly until trade uncertainty abates. We rate it as neutral to slight underperform in the near term. Within tech, enterprise software and digital services are sub-sectors to favor (steady demand, domestic focus), whereas semiconductors and consumer electronics hardware are sub-sectors to be cautious on (tariffs on components and final goods, supply chain disruptions). Once the Fed eases more, the entire sector could get a valuation boost, but fundamentally hardware earnings are at risk in 2025.
  • Energy (Neutral): The Energy sector’s outlook is mixed and highly sensitive to global commodity trends. On one hand, tariffs do not directly target oil & gas (the U.S. did levy a 10% tariff on certain energy imports from Canada (Investor’s Guide to the April Tariffs | Charles Schwab), but the U.S. is a net energy exporter now). Domestic energy producers might actually benefit from any move to reduce reliance on foreign sources – for instance, if less oil is imported, U.S. drillers might see higher demand. Additionally, energy stocks often act as an inflation hedge – if tariffs contribute to general inflation or a weaker dollar, oil prices (in dollars) could rise, boosting oil producer profits. However, the counterpoint is that a trade war can slow global growth and thus reduce energy demand. If the global economy softens, oil and gas prices could come under pressure, hurting the sector. So far, oil prices have been range-bound. Our base case assumes moderate global growth, which should keep oil in a moderate price range ($70–$85/barrel), enough for energy firms to be profitable but not surging. We therefore expect Energy to perform roughly in line with the market. Within the sector, integrated majors (Exxon, Chevron) with strong downstream operations could be resilient, while independent drillers might be more volatile. Also, any new geopolitical tensions (e.g. Middle East) could quickly change the outlook by spiking oil prices, which would make Energy a big winner. Conversely, if recession risks rise, Energy could sink. Given these offsetting forces, we consider it neutral in a moderate scenario.
  • Utilities (Outperform): The Utilities sector is typically defensive and interest-rate sensitive, and it tends to shine when growth is uncertain and rates are falling. 2025’s environment – slower growth, elevated uncertainty, and likely Fed easing – is favorable for Utilities. Tariffs have virtually no direct impact on utilities, since electricity, water, etc. are local services. In fact, utilities benefit if industrial input costs rise, as they can often pass through fuel cost increases to customers under regulated frameworks. With bond yields potentially coming down by late 2025, high-dividend sectors like Utilities become more attractive to income investors. We expect Utilities to outperform the broader market, delivering stable returns with lower volatility. The sector’s dividends (often 3%+ yields) provide a cushion and its earnings are very stable (people need power and heat regardless of tariffs). Within utilities, there’s not a huge divergence in sub-sectors (all are regulated monopolies in essence), though those with renewable energy portfolios or grid upgrade programs could see growth tailwinds from any infrastructure policy incentives. Overall, utilities serve as a haven, and in a capital-preservation focused strategy, an overweight to Utilities makes sense. We foresee positive low double-digit returns (including dividends) for utilities if our base case holds – better than the mid single-digit for S&P.
  • Healthcare (Outperform): Healthcare is another defensive sector with relatively limited exposure to trade fluctuations. Pharmaceuticals and biotech companies largely rely on domestic R&D and have pricing power that is not directly affected by tariffs (though we note some pharmaceutical ingredients are imported, the Reuters report indicated pharmaceuticals were initially considered for tariffs (US may exclude sector-specific tariffs on April 2, reports say, but situation fluid | Reuters), but presumably lifesaving drugs will be mostly exempt to avoid public health issues). Medical device makers do import some components but can often find alternate suppliers. Moreover, healthcare demand is non-cyclical – people require medications and services regardless of economic conditions. With an aging population and potentially increased healthcare spending in any budget deals, the sector has secular support. Politically, there’s also talk of rolling back certain regulations or expanding telehealth, etc., but no significant headwinds unique to healthcare are seen in this scenario. Thus, we expect Healthcare to outperform or at least provide solid positive returns with low correlation to trade issues. Sub-sector wise, healthcare providers/hospitals benefit from any increase in insured populations or government health programs (indirectly possible if fiscal policy expands coverage or if higher employment in manufacturing comes with insurance). Pharma and biotech could see a stock boost if any repatriation or tax incentives are given for producing drugs domestically (some discussion of encouraging domestic production of generic drugs has happened in response to supply chain worries). Even without that, their earnings are stable. One caveat: If the administration pursues aggressive drug price reforms (less likely given other priorities), that could cap pharma gains. But overall, a moderate scenario likely sees healthcare doing well as a defensive play.
  • Financials (Underperform): The Financials sector, especially banks, is likely to face headwinds in this environment. A combination of slower economic growth and a potential flatter yield curve tends to squeeze bank profits. As business activity cools, loan demand (commercial loans, mortgages) could slacken. Tariffs can also introduce credit risk – for instance, small manufacturers or farmers hurt by the trade war might have trouble repaying loans, leading to higher delinquencies for banks in affected regions. Additionally, if the Fed cuts rates, banks’ net interest margins (difference between lending and deposit rates) typically compress. In the last trade war episode (2019), financial stocks lagged once the Fed pivoted to cuts. On the capital markets side, volatility can increase trading revenues for investment banks a bit, but if confidence is low, IPOs and M&A might slow, hurting fee income. Insurance companies, another part of Financials, could see mixed effects: life insurers benefit if long-term rates fall slower than short-term (they invest in bonds), but property insurers might not be directly impacted by tariffs at all. Asset managers could suffer if equity markets churn and investors pull back. Overall, we foresee Financials underperforming, particularly the banking industry. Sub-sectors like regional banks are at risk if local economies (like Midwest farming regions) are hit by tariffs, whereas large money-center banks have diversification but also lots of capital markets exposure that could be volatile. The one silver lining could be if interest rates don’t fall too much and loan growth continues due to fiscal stimulus – then banks could muddle through. But relative to other sectors, we rank Financials lower.
  • Industrials (Underperform): The Industrials sector encompasses manufacturing, capital goods, aerospace/defense, and transportation – many of which are in the eye of the trade storm. Tariffs on raw materials (steel, aluminum) raise input costs for industrial companies (US may exclude sector-specific tariffs on April 2, reports say, but situation fluid | Reuters). At the same time, retaliatory tariffs abroad often target U.S. industrial exports (e.g. aircraft, machinery). Companies like Caterpillar, Boeing, Deere, etc., could see higher costs and lost sales. Furthermore, supply chain disruptions (parts delays, need to re-source components) can hamper production efficiency. While defense spending is a bright spot (companies like Lockheed or Raytheon in the defense sub-sector should benefit from ramped-up U.S. and European defense budgets (Investor’s Guide to the April Tariffs | Charles Schwab)), that might not fully offset weaknesses in commercial aerospace and general manufacturing. The transportation sub-sector (railroads, shipping, logistics) also could feel pain as overall trade volumes through ports decline and supply chains shift – though if companies relocate production to the U.S., rail and trucking domestically might see some gains in moving raw materials and finished goods internally. Another factor: if infrastructure spending picks up, construction machinery and industrial suppliers could get a bump in demand. So it’s not universally bleak – some industrial niches tied to domestic projects or defense are winners. On balance, however, we expect Industrials to underperform the market in 2025. They face too many negatives from the trade war initially. Within the sector, Aerospace/Defense is split (defense up, commercial aerospace down – Boeing for example faces possible EU tariffs on planes and weaker airline purchasing if travel slows). Construction machinery (Deere, CAT) could bounce if infrastructure is big, but near term they are hurt by tariffs on parts and foreign sales (e.g. China was a big market for CAT, now less so). Industrial suppliers and electrical equipment firms are also exposed to tariffs on components. Given these factors, we tilt underweight on Industrials in a moderate-to-conservative portfolio until clarity on trade emerges.
  • Consumer Discretionary (Underperform): The Consumer Discretionary sector is quite exposed to tariffs because it includes retailers, automakers, apparel companies, and leisure services, which all rely on consumer spending and global supply chains. Tariffs raise the cost of consumer goods, effectively a tax on consumers. Notably, a 25% tariff on imported autos will significantly increase car prices, likely reducing auto sales (Wall St Week Ahead Wobbly US stocks face test with tariffs, jobs data | Reuters). U.S. auto manufacturers (Ford, GM) might benefit slightly from import tariffs on foreign cars, but they themselves often import parts and also face retaliation in overseas markets, so net-net it’s challenging (shares of GM and Ford fell on the auto tariff announcement (Wall St Week Ahead Wobbly US stocks face test with tariffs, jobs data | Reuters)). Retailers and apparel companies: many source inventory from China/Vietnam etc. Tariffs on those imports (clothing, shoes, electronics) mean higher consumer prices or margin compression if retailers eat the cost. Big-box retailers like Walmart or Target may try to shift sourcing, but some price hikes are inevitable, potentially denting sales volumes. E-commerce giants like Amazon could pass on costs to consumers or suppliers. The consumer’s real income is eroded by higher prices, which could especially curb discretionary purchases (luxury goods, entertainment, dining out). Moreover, if the economy slows and unemployment ticks up, consumer confidence may falter. One exception within discretionary might be entertainment/media (which is included in Communication Services for some classification, but certain media companies are discretionary): those aren’t directly tariff-impacted and could hold up as consumers still spend on streaming or cheap entertainment if they cut back on travel or big-ticket items. Also, Homebuilding (discretionary) might see a boost if interest rates decline, but tariffs on lumber and materials could offset some of that. On the whole, we expect the Consumer Discretionary sector to underperform, especially in early-mid 2025 when price increases hit. Sub-sector wise, Automotive is likely one of the hardest-hit (sales down, costs up). Household durables and apparel also face margin pressure. Restaurants and leisure might see spending cut by consumers facing higher living costs. We would lean towards essential retail (Costco, etc.) over discretionary retail in this climate. Only if a trade resolution occurs by holiday 2025 would we turn more positive on discretionary.
  • Consumer Staples (Outperform): The Consumer Staples sector includes food, beverages, household products, and other necessities. These companies typically have stable demand – consumers don’t stop buying toothpaste, soap, or groceries even in tough times. They also often have the ability to pass on modest price increases because their goods are low-ticket necessities. Tariffs can affect staples too (for instance, tariffs on food imports or on packaging materials), but many staples firms source domestically or diversify sourcing. If their input costs rise, they can raise prices at the supermarket a bit without huge volume loss (consumers might grumble but still buy milk, cereal, etc.). Additionally, some staples companies might even benefit indirectly from trade shifts – e.g. domestic farmers could sell more locally if exports fall (helping food processors with input supply), or if foreign specialty foods become expensive, consumers may switch to domestic brands. Historically, Staples stocks perform well during economic slowdowns and market volatility, as investors seek safety in their steady earnings and dividends. We anticipate Staples will outperform the market in this scenario, delivering solid returns. Sub-sectors like packaged foods, beverages, and household/personal care products should be strong. There could be some segmentation: companies with heavy international sales might see some hit from foreign retaliatory tariffs (for example, a whiskey distiller facing European tariffs), but overall, their global diversification often helps too (a downturn in one region offset by strength in another – notably, Schwab’s analysis expects Europe’s consumer outlook to improve as U.S. slows (Investor’s Guide to the April Tariffs | Charles Schwab), which could aid multinational staples). Within staples, we especially favor dividend-paying giants (those typically have pricing power and global scale) and those with value-oriented brands (as consumers trade down from premium discretionary to basic staples, companies that sell essentials benefit).
  • Real Estate (Neutral): The Real Estate sector (mainly REITs – Real Estate Investment Trusts) has a nuanced outlook. REITs are sensitive to interest rates and economic conditions. On one hand, lower interest rates (Fed easing) make REIT yields more attractive and reduce their financing costs, often boosting REIT valuations. So the anticipated rate trajectory (holding then cutting) is a tailwind. Also, some property types can be defensive – e.g. residential rental REITs often do fine if homebuying slows (people rent), and industrial/storage REITs could actually benefit from companies needing more warehouse space to reconfigure supply chains or hold more inventory if just-in-time gets disrupted. On the other hand, commercial real estate relies on business activity. If corporate expansion slows, demand for office or retail space might stagnate. Tariffs could hurt retail REITs if stores close due to squeezed margins. Also construction costs for new development (steel, materials, labor) are rising with tariffs and wage inflation, which could slow new projects – a mixed bag (good for existing landlords as less new supply, but also means less growth). We assign a neutral performance to Real Estate overall. We suspect REITs will produce decent total returns (especially via their dividends, often 4%+ yields) but not dramatically outperform staples/utilities. Sub-sector analysis: Industrial REITs (warehouses) might outperform given robust demand from e-commerce and supply chain shifts (companies may store more goods domestically to avoid supply shocks). Residential REITs should remain stable as housing demand for rentals is steady; if mortgage rates dip with Fed cuts, housing might pick up but probably not enough to hurt rentals much in near term. Retail REITs (shopping centers, malls) are likely to underperform within real estate, due to retailers’ struggles (some could face bankruptcy or need rent concessions). Office REITs also face secular challenges (remote work) plus any economic slowdown could up vacancy; they are not a place we expect outperformance. So an investor in REITs should be selective toward industrial, storage, residential, and perhaps data center REITs (which benefit from cloud expansion unaffected by tariffs). Overall, we see Real Estate providing a stable, bond-like performance – valuable in a conservative portfolio but not shooting the lights out.
  • Materials (Neutral to Underperform): The Materials sector covers chemicals, metals & mining, paper, etc. It’s somewhat split by trade policy: U.S. steel and aluminum producers are clear winners of tariffs on those imports – domestic prices can rise and volume too, aiding that sub-sector. In fact, U.S. steel companies have already seen a boost from the re-imposition of 25% steel tariffs (US may exclude sector-specific tariffs on April 2, reports say, but situation fluid | Reuters). Chemicals and other globally integrated materials firms, however, face challenges: higher costs for raw inputs, and foreign tariffs on U.S. chemical exports (e.g. China has targeted U.S. petrochemicals before). A company like Dow or DuPont might pay more for feedstock or see reduced foreign orders. Agricultural chemicals (fertilizers) might see changes if farming output shifts. Additionally, if global manufacturing slows, demand for industrial materials usually dips. So while protected metals (steel, aluminum) might have a good year – some domestic steelmakers could raise prices ~10–20%, boosting margins – the broader materials sector might not fare as well if volumes drop. Considering these cross-currents, we label Materials as neutral to slight underperform. They likely won’t outperform the defensive sectors, but parts of the sector will do better than Industrials. Within materials, sub-sector plays: Steel producers – likely strong near-term (their stocks often jump on tariff protection), though one must consider that their customers (auto, construction) are weaker, which could limit how much they can capitalize. Gold and precious metals miners – not a large part of the index, but note that gold prices have hit record highs as a safe haven (US may exclude sector-specific tariffs on April 2, reports say, but situation fluid | Reuters), which could continue if uncertainty persists, benefiting gold miners. Chemical companies – likely underperform within materials due to cost pressures and any global weakness. Packaging and paper – could be neutral; more e-commerce means more packaging demand, but higher paper costs and any slowdown in consumer goods could offset that. Net-net, we lean just under neutral on the sector.
  • Communication Services (Neutral): This sector includes telecom companies, media & entertainment, and some internet companies. It’s a bit of a hybrid of defensive (telecom) and cyclical (advertising-driven media). Telecom (wireless and broadband providers) is very defensive – people maintain phone/internet service and these firms have stable cash flows, plus benefitting from any infrastructure push (5G rollout etc.). They also yield high dividends, so in a low-rate environment, telecom stocks (e.g. AT&T, Verizon) could do well. Media/entertainment companies could face softer advertising revenue if the economy slows (ad spending often correlates with GDP). However, one could argue that with consumers staying home more, streaming services and gaming might see stable or even increased demand as cheaper entertainment alternatives. The sector also includes companies like Google and Facebook (depending on classification) which get ad revenue – those might see slight ad softness but still strong secular digital ad trends. They aren’t directly tariff-impacted. On balance, we think Communication Services will be middle-of-the-pack (neutral). Telecom’s strength (defensive, dividend) will likely offset any weakness in ad-driven media. Also, any Fed easing helps the heavily indebted telecoms by lowering interest costs. We don’t foresee this sector being a huge outperformer like Utilities, but it should hold its own or perhaps modestly beat the market. Within the sector, telecom sub-sector likely to outperform (similar reasons to utilities – predictable income, rate sensitivity). Entertainment/content sub-sector depends on consumer trends; companies with strong streaming platforms might do well as people cocoon at home more to save money instead of traveling. Interactive media (if included here) like social media giants remain largely driven by other factors than tariffs, so likely continue to grow, albeit with regulatory overhangs. Thus, a neutral stance is warranted with a slight positive bias for the telecom part.

In summary, the sectors we expect to outperform in the 2025 tariff-induced climate are generally the defensive, domestic-focused ones: Utilities, Healthcare, Consumer Staples, and to a lesser extent Real Estate (selected REITs) and Telecom (within Communication Services). These sectors combine steady cash flows, inelastic demand, and often attractive dividends – qualities that investors value when uncertainty is high and a moderate-to-conservative risk approach is preferred. They also benefit from the likely decline in interest rates (lower yields make their stable dividends and bond-like characteristics more appealing).

On the flip side, cyclical and trade-sensitive sectors are set to underperform: Industrials, Financials, Consumer Discretionary, and parts of Materials and Technology. These face either direct tariff pressures, indirect macro slowdown effects, or both. Within these, there will be niche winners (e.g. defense in Industrials, steel in Materials, software in Tech, etc.), but as a group they carry more risk and volatility. A conservative portfolio would underweight these areas until clear signs of trade détente or an economic re-acceleration emerge.

ETF Selection: Likely Outperformers vs Underperformers

To implement a sector and style tilt in line with our outlook, we identify specific Exchange-Traded Funds (ETFs) that investors could use. Below, we list some ETFs that are poised to outperform in this macro environment and some that are likely to underperform, along with the rationale:

Likely Outperforming ETFs:

  • Invesco S&P International Developed Low Volatility High Dividend ETF (Ticker: LVHI): This ETF holds a basket of international developed-market stocks with low volatility and high dividends. It is well-suited for the current climate for a few reasons. Firstly, as noted, major international markets (Eurozone, UK, Japan) are expected to accelerate or at least hold up relatively well in 2025 (Investor’s Guide to the April Tariffs | Charles Schwab), partly thanks to their own stimulus offsetting the U.S. slowdown. European equities have already been outperforming U.S. stocks year-to-date (Investor’s Guide to the April Tariffs | Charles Schwab). By holding developed international dividend stocks, LVHI taps into markets that may benefit from trade diversion (e.g. if China and EU trade more with each other, their firms could gain) and from local stimulus (e.g. Europe’s fiscal boost). Secondly, the low-volatility, high-dividend factor means it selects for relatively defensive, stable companies overseas, providing income and downside protection. With global uncertainty, this factor profile should shine. Additionally, the U.S. dollar may weaken somewhat if the Fed cuts rates and if tariffs reduce capital inflows; a weaker dollar would boost the USD returns of international equities (LVHI would gain from currency translation). All told, LVHI offers capital preservation with upside – exactly what a moderate-conservative investor might seek now. Its combination of yield and exposure to regions less impacted by U.S. tariffs makes it a likely outperformer in a balanced portfolio.
  • Schwab U.S. Dividend Equity ETF (Ticker: SCHD): SCHD focuses on quality U.S. companies with sustainable high dividends. This is a domestic play on stability and value. In a slowing economy with potential market turbulence, high-quality dividend stocks tend to outperform as investors gravitate to reliable income. SCHD’s holdings skew towards sectors like Consumer Staples, Healthcare, Telecom, Utilities, Financials – many of which we identified as relative winners. Its methodology also emphasizes strong cash flows and consistent dividends, so it avoids the most volatile or speculative names. As the Fed potentially eases, bond yields falling make dividend yields more attractive, which should drive flows into funds like SCHD. Indeed, dividend-focused strategies often act defensively: they historically lose less in down markets and keep up reasonably in up markets. We expect SCHD to outperform the broad S&P 500 on a risk-adjusted basis, likely delivering positive returns even if the S&P is flat. It’s a good fit for a capital preservation stance because it provides equity exposure with a value tilt and lower volatility. While not immune to market dips, SCHD’s companies (think Coca-Cola, Pepsico, Verizon, Home Depot, etc.) can weather economic headwinds better than highly cyclical firms. Thus, SCHD is a top choice for the current macro environment.
  • Utilities Select Sector SPDR (Ticker: XLU): This ETF tracks the Utilities sector of the S&P 500. As argued above, Utilities should do well thanks to their defensive nature and falling interest rates. XLU offers concentrated exposure to that outperformance thesis. It has a high dividend yield (around 3%) and holds stable names like electricity and gas providers. If our forecast holds and Utilities beat the S&P 500, XLU will directly capture that excess return. For an investor leaning conservative, XLU provides downside protection – in past market corrections, utilities decline much less than the market. In this scenario, even if the market were to unexpectedly drop (bear case), XLU would likely drop far less or might even rise if rate cuts are drastic. It aligns with “capital preservation” while still giving “upside potential” via its dividends and any modest appreciation. Therefore, XLU is likely to outperform the broad market on a total return basis in 2025.
  • Vanguard Consumer Staples ETF (Ticker: VDC): To capitalize on the strength in Consumer Staples, an ETF like VDC is suitable. It holds the major food, beverage, household goods companies (e.g. Procter & Gamble, Coca-Cola, Walmart, etc.). We foresee staples doing well (as discussed, steady demand, pricing power). VDC will benefit from investors rotating into staples for safety. It’s also a relatively low-volatility fund with a decent yield (~2.5%). In a moderate scenario, staples’ earnings might even surprise to the upside as they raise prices modestly without hurting volume, boosting margins. VDC could thus see not only relative but possibly absolute outperformance, especially if the market’s growthier parts are under pressure. It’s worth noting that VDC’s top holdings include some retailers (like Walmart, Costco) which are staples-oriented retailers that can pass costs through and attract consumers looking for value – those should hold up well too.
  • iShares Select Dividend ETF (Ticker: DVY): Similar in vein to SCHD, DVY holds a broad selection of U.S. stocks with high dividends. It has more of a tilt towards utilities, energy, and financials. DVY may outperform due to the same yield-seeking dynamic and defensive composition. It’s a bit more value-oriented than SCHD. Given our positive view on utilities and neutral on energy, DVY could indeed do quite well. However, its financials exposure could drag slightly. Still, overall it aligns with the theme of dividend and value outperformance. Another ETF in this category is NOBL (ProShares S&P 500 Dividend Aristocrats) which specifically holds companies that have raised dividends for 25+ years straight. Those are often very stable, blue-chip companies (Johnson & Johnson, P&G, etc.), which likely will weather the storm. We expect such ETFs focusing on dividend “aristocrats” to outperform as well, because these aristocrat companies often hail from the sectors we like (industrials that are less cyclical, staples, healthcare, etc.) and have proven resilience.
  • iShares U.S. Healthcare Providers ETF (Ticker: IHF) or Health Care Select SPDR (XLV): For a purer healthcare tilt, one might use XLV (broad healthcare) or IHF (healthcare providers). We highlight that healthcare overall should outperform, so XLV is likely a straightforward winner, covering pharma, biotech, devices, and insurers. We might particularly mention IHF if focusing on sub-sectors: health insurance and hospital companies might benefit from any policy that increases coverage or simply from an aging population using more services. However, broad XLV is simpler and includes large pharma (which though not trade-exposed could face internal policy risk). Either way, a healthcare ETF would be a good performer in a defensive strategy.

Likely Underperforming ETFs:

  • iShares Russell 2000 ETF (Ticker: IWM): The Russell 2000 index of small-cap stocks could underperform in this environment. Small caps typically have higher domestic exposure – which might seem good given focus on U.S. economy – but they also often lack the pricing power and financial resilience of large caps. With tariffs raising costs, small manufacturers or retailers might get squeezed more than large multinationals that can absorb or negotiate costs. Also, small caps tend to be more sensitive to rising input costs (many small firms operate on thinner margins). They also may find it harder to shift supply chains quickly or get exemptions. Additionally, if credit conditions tighten or banks get cautious, small caps (who rely on bank loans) could be constrained. Year-to-date, small caps have indeed lagged as recession concerns grew. We expect that trend to continue until trade and macro outlooks improve. Thus, IWM (or other small-cap ETFs) are likely to underperform the S&P in a moderate or bear scenario. In a bull scenario (trade resolution and strong growth) small caps could rally, but given our moderate base, we’d underweight IWM.
  • iShares MSCI Emerging Markets ETF (Ticker: EEM): Emerging market stocks face multiple challenges here. Many EM countries (China, Mexico, South Korea, etc.) are directly targeted by the U.S. tariffs (US may exclude sector-specific tariffs on April 2, reports say, but situation fluid | Reuters). For instance, China is a big portion of EEM; its stock market may remain under pressure from the trade war and slower Chinese growth. Other EMs like South Africa, Brazil, or Southeast Asia could suffer collateral damage if global trade volumes fall. Some EMs might benefit by replacing China in supply chains (Vietnam, India see some investment inflows as companies relocate factories), but overall EM equities tend to do poorly when U.S.-China tensions are high, the dollar is strong, and global investors are risk-averse. There’s also the factor of rising inflation and potential Fed policy – historically, EM underperforms when the Fed is tightening, but even in easing cycles, if global trade is down, EM export-driven economies hurt. In our base case, EM growth decelerates (except maybe commodity-exporters if commodities rise). Additionally, within EEM, state-run companies and commodity firms are big components – a slow global growth scenario won’t help them. Therefore, we foresee EEM underperforming relative to U.S. equities in the near term. We would be cautious on EM until a clear trade truce or a substantial drop in the dollar materializes (which might happen later in 2025 if Fed cuts a lot). Until then, EM is higher risk without commensurate higher reward, which a conservative profile would avoid.
  • Invesco QQQ Trust (Ticker: QQQ): QQQ tracks the Nasdaq-100, heavy in mega-cap tech. Now, this is tricky: earlier we said Nasdaq might outperform marginally due to Fed cuts helping tech. However, QQQ is very concentrated in a few big tech names (Apple, Microsoft, etc.). Apple, for example, could be significantly impacted by tariffs on Chinese imports (iPhones, etc. coming from China face levies). If Apple’s sales or margins weaken, it drags QQQ. Also, if investors get skittish, high-valuation tech could see bigger swings. In a defensive strategy, QQQ is relatively high volatility, and even though we don’t expect it to crash, its risk profile might not suit a moderate-conservative stance. Thus, while we don’t necessarily think QQQ will vastly underperform the S&P, it has more downside risk if trade war escalates (tech was hit hard in late 2018’s trade scare). So for safety, one might underweight QQQ in favor of SCHD or other value-oriented funds. That said, we acknowledge in our base scenario QQQ likely does okay (hence Nasdaq composite rising nicely by Q1 2026). So perhaps QQQ is not a worst underperformer pick, but it’s riskier. If choosing a growthy ETF likely to underperform, one could also cite ARK Innovation (ARKK) (very high-beta tech disruptors) – those would likely struggle in a high-volatility, rising cost of capital environment. But ARKK is niche.
  • Industrial Sector ETF (XLI): As previously reasoned, an ETF like XLI (Industrial Select Sector SPDR) is poised to underperform. It holds major industrial stocks (Boeing, 3M, Honeywell, Union Pacific, etc.). With multiple headwinds on those companies (tariffs, slowing capex, etc.), XLI likely lags the S&P. We could see XLI remaining flat or down in 2025 even if the S&P rises a bit. Its recovery might only come once tariff issues are resolved or fully priced in. For a conservative tilt, one would underweight or short XLI versus something like XLP (Staples).
  • Automotive or Metal-specific ETFs: If one wanted to play direct underperformers, there are niche ETFs like Global X Autonomous & Electric Vehicles ETF (DRIV) or First Trust Global Auto ETF (CARZ) that focus on auto sector – those likely underperform given the auto tariff and global auto downturn scenario. Similarly, a Steel ETF (SLX) might initially jump with tariffs but then could underperform if global demand slows and if users of steel cut back (so this one is more uncertain – short term up, medium term maybe down). But these are more specialized. Given the user’s mention of LVHI, SCHD, it seems they want broad sector/style ETFs.

Summarizing, an investor aiming for capital preservation with upside should overweight ETFs like LVHI, SCHD (international and domestic dividend strategies), and sector funds like XLU (Utilities), XLV (Health), XLP (Staples) which offer defensive positions with decent return prospects. Underperformers to avoid or underweight would be small-caps (IWM), emerging markets (EEM), and cyclicals (XLI, XLY – consumer discretionary ETF – which includes retail and auto, likely weak).

We present all these expected outcomes and recommendations succinctly in the master table below for quick reference. The table consolidates the economic forecasts, index targets, sector performance outlook, and selected ETFs with their expected performance bias.

Master Table: Economic & Market Forecast Summary (Q2 2025 – Q1 2026)

Below is a comprehensive table summarizing key data points from our analysis – including quarterly economic indicators, major stock index targets, sector outlooks, and representative ETFs with performance probabilities – under our base case scenario (moderate impact, with moderate-to-conservative positioning). All figures are in bold for base case values, with (*) indicating qualitative outlook (Outperform, Underperform) relative to peers. Probabilities for scenarios and performance directions are noted where applicable.

CategoryIndicator/AssetQ2 2025Q3 2025Q4 2025Q1 2026Outlook/Comments
Macro EconomyGDP Growth (Real QoQ, ann.)+1.4%+1.0%+1.8%+2.0%Slower growth mid-2025, picking up by Q4 as fiscal stimulus kicks in. Base case ~60% probability; bear case could see one quarter ~0% ([Investor’s Guide to the April Tariffs
Inflation (CPI, YoY)3.1%3.3%3.0%2.6%Tariff-driven bump peaking Q3 ([Fed in no rush to cut rates; Trump disagrees
Unemployment Rate4.2%4.3%4.5%4.4%Gradual rise from 4.1% ([Fed in no rush to cut rates; Trump disagrees
Fed Funds Rate (upper bound)4.50%4.50%4.25%4.00%On hold into Q3, slight cut by Q4 if growth weakens ([Fed in no rush to cut rates; Trump disagrees
10-Year US Treasury Yield~3.9%~3.7%~3.5%~3.4%Gradual decline as Fed easing expected and safe-haven demand. Yield curve likely flattens then steepens if Fed cuts.
Major Stock IndicesS&P 500 Level (Price)––≈4,800≈4,900Modest gain (~+5% YoY) by YE 2025, recovering from -5% in Q1 ([Wall St Week Ahead Wobbly US stocks face test with tariffs, jobs data
Dow Jones Industrial Avg.––≈36,000≈36,500Slightly lagging S&P (+4% YoY) due to industrial exposure. Tariffs weigh on multinationals.
Nasdaq Composite Level––≈15,000≈15,500Outperforms S&P with ~+8% YoY, as Fed easing boosts tech valuations. Offset by some tech supply chain issues.
S&P 500 Earnings Growth (YoY)~+2%~0%~+3%~+5%Flat-to-low growth in 2025 earnings as tariffs squeeze margins (Trump’s “Liberation Day”: The April 2 Tariff Plan and Its Potential Economic Impact). Rebounds in 2026 as economy adjusts.
Volatility Index (VIX)~20–22~20~18~15–18Elevated H1 2025 on trade fears ([US may exclude sector-specific tariffs on April 2, reports say, but situation fluid
Sector PerformanceTechnologyNeutral / ↓–––Neutral-to-Slight Underperform: Hardware & semiconductors face tariffs ([US may exclude sector-specific tariffs on April 2, reports say, but situation fluid
EnergyNeutral–––Mixed factors: Domestic producers gain if foreign energy tariff ([Investor’s Guide to the April Tariffs
UtilitiesOutperform (↑)–––Defensive, inelastic demand; lower yields improve relative appeal. Likely to beat S&P in 2025.
HealthcareOutperform (↑)–––Defensive sector; minimal trade exposure. Stable demand supports above-market performance.
FinancialsUnderperform (↓)–––Pressure on banks: slower loan growth, margin squeeze; credit risks in trade-exposed sectors. Insurance/asset managers also face headwinds.
IndustrialsUnderperform (↓)–––Hit by tariffs on inputs and retaliatory export curbs, e.g. machinery, autos. Defense spending boost not enough to offset broad drag.
Consumer DiscretionaryUnderperform (↓)–––Higher import costs curb spending: 25% auto tariffs add cost ([Wall St Week Ahead Wobbly US stocks face test with tariffs, jobs data
Consumer StaplesOutperform (↑)–––Steady demand, pricing power: Necessities can pass on costs modestly. Defensive play with likely strong relative returns.
Real Estate (REITs)Neutral–––Mixed: Lower rates aid REITs, but slower economy softens commercial real estate. Industrial/logistics REITs strong; retail REITs weak.
MaterialsNeutral / ↓–––Split effects: Domestic steel makers benefit (25% steel tariff) ([US may exclude sector-specific tariffs on April 2, reports say, but situation fluid
Comm. ServicesNeutral–––Telecom up, media mixed: Telecom defensive with yield; media/advertising could slow with economy. Overall in line with market.
ETF ImplicationsLVHI – Invesco S&P Intl. Low Vol/Hi Div––Outperform (↑)–Focus on developed markets benefiting from relative strength ([Investor’s Guide to the April Tariffs
SCHD – Schwab U.S. Dividend Equity––Outperform (↑)–High-quality U.S. dividend stocks (value tilt). Should outperform broad S&P in volatile, slowing growth environment (stable earnings, ~3% yield).
XLU – Utilities Select SPDR––Outperform (↑)–Pure play on utilities outperformance: defensive, rate-sensitive sector. Expected to beat market in 2025 with lower volatility.
XLP – Consumer Staples SPDR––Outperform (↑)–Staples ETF: captures strong performance of consumer necessities. Likely to deliver positive returns and outperform cyclical sectors.
IWM – iShares Russell 2000 (Small Caps)––Underperform (↓)–Small caps more vulnerable to higher costs (thin margins) and weaker domestic growth. Riskier profile; expected to lag large caps.
EEM – iShares MSCI Emerging Mkts––Underperform (↓)–EM equities hampered by U.S.-China trade war (China ~30% of EEM), strong USD, and risk aversion. Likely trails U.S. stocks until trade tensions ease.
XLI – Industrials Select SPDR––Underperform (↓)–Broad industrial ETF hit by trade disruption (global supply chain). Contains tariff-exposed names (Boeing, CAT); likely to lag S&P 500.
XLY – Consumer Discr. Select SPDR––Underperform (↓)–Retailers, autos, consumer services ETF. Tariffs and cautious consumers = headwinds. Expected to underperform defensive sectors.
NOBL – S&P 500 Dividend Aristocrats––Outperform (↑)–Basket of elite dividend growers. Historically resilient in downturns. Aligns with capital preservation and should outperform broader market in this climate.

(↑ = likely outperform; ↓ = likely underperform relative to benchmark; Neutral = in line with market)

Conclusion

In conclusion, the planned April 2, 2025 U.S. tariffs mark a pivotal shift in trade policy with wide-ranging implications for the economy and markets. The tariffs – aimed at a broad swath of countries and products – are expected to increase costs for U.S. businesses and consumers, provoke retaliation from key trade partners, and introduce significant uncertainty into global trade flows. Economic growth in the U.S. will likely slow in the coming quarters, as evidenced by the Fed’s downgrading of growth projections to ~1.7% (Fed in no rush to cut rates; Trump disagrees | Reuters) and acknowledgment of “turmoil” dampening sentiment (Fed in no rush to cut rates; Trump disagrees | Reuters). We anticipate a period of slower growth and higher inflation (a mild stagflation) in 2025, with GDP growth about 0.4% lower than it would have been without the tariffs (Trump’s “Liberation Day”: The April 2 Tariff Plan and Its Potential Economic Impact) and inflation about 0.3% higher, according to both independent analyses and Federal Reserve commentary (Fed in no rush to cut rates; Trump disagrees | Reuters).

However, this drag is manageable with the right policy response, and the U.S. is deploying that response. Fiscal measures – from tax cut extensions to potential infrastructure spending – are poised to support demand and cushion affected groups (e.g. farmers and manufacturers), injecting perhaps several trillion dollars of stimulus over the next decade (Trump Tax Cuts 2025: Budget Reconciliation | Tax Foundation) (US Senate plan to make Trump tax cuts permanent raises ‘debt spiral’ worry | Reuters). Monetary policy is also bending to accommodate; the Fed stands ready to lower interest rates if needed, and in our base case will likely enact at least a couple of rate cuts by early 2026 (Fed in no rush to cut rates; Trump disagrees | Reuters). Together, these actions should prevent the worst outcomes and keep the expansion on track, albeit at a slower pace.

Our probability-weighted forecast envisions that the U.S. will navigate this trade turbulence without veering into recession – a soft landing scenario where growth downshifts to ~1.5%–2% for a few quarters and then gradually reaccelerates toward 2%+ by 2026, as trade tensions hopefully abate and stimulus takes effect. Inflation, after a transient bump above 3% next year, should trend back toward ~2% by 2026, assuming no further tariff escalations (Tariff-Driven Inflation Boost Is ‘Inevitable,’ Fed’s Collins Says). Unemployment may rise modestly into the mid-4% range but is not expected to spike dramatically, thanks to offsetting job gains in stimulus-fueled sectors and the service economy’s resilience.

Internationally, reactions to the U.S. tariffs will shape global trade patterns: China’s aggressive retaliation on agriculture (China hits US agriculture, says it won’t be bullied by fresh Trump tariffs | Reuters) and vow to “fight to the end” (China vows it will ‘fight to the end’ with US in trade war – or any other war | China | The Guardian) suggest the U.S.-China trade relationship may be entering a protracted standoff, potentially fragmenting the global trading system into blocs. The EU’s preparation of counter-tariffs (Trump’s “Liberation Day”: The April 2 Tariff Plan and Its Potential Economic Impact) and simultaneous stimulus (e.g. Germany’s investment package (Investor’s Guide to the April Tariffs | Charles Schwab)) indicate Europe is striving to both defend its interests and bolster its economy. These global adjustments mean investors should expect a world with more localized supply chains, shifts in market leadership (non-U.S. equities could shine as noted by OECD forecasts (Investor’s Guide to the April Tariffs | Charles Schwab)), and continued headline risks. In effect, the tariff actions could redraw the map of international trade, leading to a new equilibrium over the coming years.

For financial markets, selectivity and defensiveness will be paramount in the interim. We recommend a moderate-to-conservative portfolio tilt, emphasizing capital preservation but maintaining upside exposure through high-quality assets. Concretely, this translates to overweighting defensive equity sectors and dividend-focused strategies – companies that can weather economic stress and still return cash to shareholders. Our analysis identified sectors like Utilities, Consumer Staples, and Healthcare as poised to outperform, given their stable demand and limited tariff impact. Correspondingly, ETFs such as SCHD (U.S. Dividend Equity) and LVHI (Int’l Low Volatility High Dividend) provide diversified ways to capture these themes (with LVHI adding the benefit of exposure to foreign markets that may outpace the U.S. during this period (Investor’s Guide to the April Tariffs | Charles Schwab)). These picks align with a capital preservation mindset by offering lower volatility and income generation, while still participating in equity upside.

Conversely, we advise underweighting or hedging sectors that are most vulnerable to trade frictions, including Industrials, Financials, and Consumer Discretionary. These areas face greater earnings uncertainty and have historically underperformed during trade war episodes. Investors might rotate out of broad market funds into more targeted ones (for example, shifting some S&P 500 exposure to a quality dividend fund like SCHD or an equal-weight utilities/staples basket) to achieve this tilt. Additionally, being cautious on small-cap and emerging-market equities is warranted until a clearer resolution on trade emerges, as those segments could suffer disproportionally from higher financing costs and external shocks.

By following this strategy, an investor can lower portfolio risk and still achieve reasonable returns. Our forecasts suggest that even with a conservative stance, one can expect positive equity returns by year-end 2025 – albeit in the mid-single-digit range for broad indices, rather than the blockbuster gains of recent years. This is consistent with an environment of slower growth but not contraction. Meanwhile, bond allocations may play a bigger role in preservation: with the Fed likely easing, high-quality bonds could rally, complementing the equity portion for total portfolio stability.

To be sure, uncertainties abound. The range of outcomes is wide – a swift trade deal could accelerate growth and lift all sectors, whereas an escalating tit-for-tat could risk a recession and require more drastic Fed intervention. We have accounted for these with scenario probabilities, but real-world developments may not neatly follow any script. Thus, ongoing monitoring of key indicators – such as trade negotiation progress, inflation prints, Fed communications, and global PMIs – will be critical. Flexibility to adjust the strategy as conditions evolve is also crucial (for example, if a broad trade truce is reached, one might pivot to add more cyclical exposure quickly to capture the rebound).

In sum, our detailed analysis leads to a cautiously optimistic thesis: the U.S. economy will endure the 2025 tariff shock with a slower but continuing expansion, aided by fiscal and monetary backstops. While there will be palpable pain in certain industries (e.g. export-oriented manufacturers and farmers) and consumers will face somewhat higher prices, the overall trajectory should remain positive, not derailed. Financial markets, after an initial bout of volatility and sector rotation, are likely to find footing and deliver modest gains, rewarding those who stay vigilant yet invested. By prioritizing high-quality, income-generating assets and maintaining a diversified global perspective, investors can both protect their capital and partake in the eventual upside as the economy and trade regime adjust to the new reality. The emphasis on capital preservation with upside potential – the core of a moderate-conservative approach – is well-served by the mix of defensive equity exposure and prudent policy-driven optimism we have outlined.

Ultimately, the situation is fluid, but armed with the insights from data and historical precedent, one can approach the coming quarters with a balanced strategy that navigates the fine line between caution and opportunity. The keys will be patience, diversification, and alignment with the fundamental shifts underway – exactly the approach we have taken in crafting this report and its recommendations.

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