April and May have been a whirlwind for markets. Since President Trump’s April 2 “Liberation Day” announcement – which imposed a baseline 10% tariff on nearly all foreign imports – tariffs have become a central driver of uncertainty and volatility.
Currently, the US has reached a trade deal with the UK and is reportedly close to agreements with key partners like India. The US and China’s trade war, once red-hot, also appears to be cooling, with the US reducing tariffs to 30% from 145%, and China cutting rates to 10% from 125%.
While these developments have brought some immediate relief – and a surge in consumer confidence – macroeconomic uncertainty continues to loom large. Many major players believe a recession is likely and have questioned whether the economy can absorb such rapid shifts in global trade policy.
For investors, the landscape has led to key questions: How will tariffs impact the economy in the short- and long-term? Which companies will be most affected by the tariffs? Can the US economy and consumers weather the storm?
Are Recession Fears Justified?
Tariffs under Trump's administration are likely to depress economic activity in the near-term, with GDP growth potentially coming in below market expectations in the first half. Despite this initial setback, there are several catalysts on the horizon that could drive a rebound.
For starters, the preliminary China trade deal is a significant step forward. Prior to the agreement, a lack of clarity around policy signals had forced many businesses to delay decisions and cancel certain projects. While it doesn’t entirely erase uncertainty, the new deal does provide enough clarity to resurrect capital projects previously put on hold, including some that were underway even before the election.
Companies also have many tools at their disposal to offset tariff impacts. One common strategy is simply to raise prices, either by increasing the list price – the standard, published price of a product or a service – or the surcharge – a temporary additional fee added on top of the list price. While pricing strategies vary, many companies have so far chosen to raise list prices. As these are harder to retract, they provide companies an advantage if tariffs are eased – creating the potential for a "double dip" in profits as costs decrease while elevated prices remain in place.
Additionally, firms are strategically pulling forward purchases of components and building buffer stocks to mitigate tariff impacts. Coupled with possible GOP tax cuts, this proactive stance sets the stage for a potentially bullish second half of the year.
When these factors are coupled with positive economic indicators, such as strong employment figures, the lowest inflation levels since 2021, and robust home equity positions, it’s hard to identify a key area that could trigger a recession.
Analyzing the Impact on Companies
While tariffs affect the broader economy, some sectors and companies inevitably bear a greater burden. Factors such as direct tariff costs, reliance on international sales, and exposure to China all play a part in determining a company’s risk.
One often overlooked factor is pricing power – the ability of companies to pass tariff-induced cost increases onto customers without significant backlash. For firms with a consumer as the end buyer, rather than a business, price changes may be more difficult to implement. Aggressive price hikes in discretionary industries such as Do-it-Yourself (DIY) outdoor equipment and power tools, for example, could lead consumers to delay purchases, switch to cheaper brands, or skip buying altogether.
Industry structure also plays a significant role. Often, markets structured as duopolies allow more unified pricing actions without competitive undercutting. Similarly, sectors where purchase decisions involve longer-term paybacks – like HVAC and automation technologies – benefit from stronger pricing resilience.
A Trend That’s Here to Stay
Amid the noise and media attention given to the President’s tariffs, it’s easy to lose sight of the policy’s objective: to bring manufacturing and supply chains back to the U.S.
However, that shift has already been in progress for over a decade. Even before the latest round of tariff negotiations and the Liberation Day announcement, companies had begun reassessing their global footprints, not just in response to policy, but because the economics of supply chain risk had changed.
The Covid-19 pandemic and Russia/Ukraine war exposed deep vulnerabilities in overseas production and an overreliance on unfriendly trading partners. In response, industries critical to national security and economic stability, such as semiconductors and pharmaceuticals, have seen accelerated capital spending aimed at reducing dependency on China and other potentially adversarial trading partners.
In 2023, for example, China’s portion of US imports from low-cost Asian countries dropped below 50%, down from nearly 70% in 2013.
While the outcomes of future tariff negotiations remain unpredictable, businesses and investors should recognize the extensive opportunities available through ongoing global capital realignment. Tariffs, trade policy shifts, and reshoring trends collectively offer a unique window into how the U.S. economy might evolve and offer significant investment opportunities for those who understand these dynamics.