Tariff news is ‘less bad’

Less bad—that’s a simplified though admittedly rough way to describe the trade and tariff landscape and its broader impact on stocks.

This sharp rise in tariffs reflects a major shift in U.S. trade policy that’s aimed at addressing trade imbalances and encouraging domestic production. It may also have significant implications for inflation, supply chains, and global trade dynamics.

In general, the European Union and Japan have agreed to a 15% tariff on the exports of their goods into the United States. Yet, investors reacted favorably. It’s hard to imagine such a response if that deal had been inked just a few months ago.

But that’s below Liberation Day tariffs of 20% on the EU (and one-time threat of 50%) and 24% on Japan.

In other words, it’s “less bad” than what was originally announced, and investors are breathing sighs of relief.

Source: Wall Street Journal, MSCI.com, Bloomberg, MarketWatch
MTD returns: June 30, 2025–July 31, 2025
YTD returns: December 31, 2024–July 31, 2025
**in U.S. dollars

Still, the 15% rate will likely function as a floor—one that, for most countries, probably won’t go lower (the U.K. negotiated a 10% rate). And notably, no agreement with China has been reached yet. Details on investments in the U.S. from trading partners made headlines, but details are light.

When the dust finally settles, the tax on imports may rise to a level not seen since the 1930s.

So, who’s going to pay for it? Federal Reserve Chief Jerome Powell spelled it out at his June press conference:

“The pass-through of tariffs to consumer price inflation is a whole process that’s very uncertain. As you know, there are many parties in that chain: There’s the manufacturer, the exporter, the importer, the retailer, and the consumer, and each one of those is going to be trying not to be the one to pay for the tariff,” he said.

“But together, they will all pay for it together—or maybe one party will pay it all. But that process is very hard to predict, and we haven’t been through a situation like this,” he added.

So far, tariff inflation, with a few exceptions, has been slow to appear in retail prices.

As The Wall Street Journal reported near the end of July, “Trump’s Tariffs Are Being Picked Up by Corporate America—Neither consumers nor foreign countries are assuming much of the tariff burden, at least not yet.”

But that’s corporate America. Small importers may not have the luxury of picking up the tab.

Stock markets flying high again

After a swift sell-off in early April, the market rallied, and the S&P 500 Index and the tech-heavy Nasdaq Composite notched several new highs in July, per MarketWatch data.

That’s not a signal the sharp increase in levies will seriously dent economic growth or significantly add to inflation. Investors have either become desensitized to the president’s proclamations, or they may be slowly warming to the idea that recent agreements are “less bad” than original announcements.

Additionally, fears of a destructive all-out trade war have receded.

And here is one more thought. Tariffs are generating a significant amount of revenue, but that revenue hasn’t been factored into models like those used for the OBBB Act. Additionally, tariffs don’t appear to be reflected in bond market expectations, given the potential to slow the Treasuries appetite for debt.

In many respects, tariffs aren’t being treated the same way as tax increases or spending cuts. It’s as if they’re being viewed as a low-value way to reduce the deficit. Perhaps an unfavorable court ruling could sweep some or many away. That said, there is talk of rebates being financed by incoming tariff revenue.

As we enter August and September—a period that has traditionally been marked with uncertainty—the catalysts for new highs include

• The AI story remains intact,
• Longer-term bond yields have remained relatively stable,
• The Fed has not dismissed the idea that rate cuts this year may eventually materialize,
• Corporate profits are rising,
• The economy continues to expand, and
• Businesses seem to have weathered the initial shock of the April tariff announcement.

I trust you have found this review informative and helpful. If you have any questions, concerns, or would simply like to have a conversation, please reach out to me or any member of our team.