US President Donald Trump’s trade wars are dimming the outlook for the global economy, leaving fund managers bracing for an extended period of uncertainty and positioning portfolios for new trade and political dynamics.
This is playing out in reduced forecasts for economic growth in the United States and countries already targeted by Trump’s trade policies. Tariffs are seen as likely to raise inflation, complicating the job for central banks that look to lower rates to support economic growth. Back-and-forth headlines are creating uncertainty, spurring caution among investors facing an extremely difficult-to-predict economic outlook.
Some equity fund managers are shifting toward stocks in European and Asian markets, where economies appear better-positioned to weather the trade wars thanks to government fiscal efforts, and where stocks offer more attractive valuations than US names.
Growth Forecasts Hit by Trade War Concerns
Optimism about the health of the US and global economy has taken a hit. Forecasts from the US Federal Reserve now see GDP growth of 1.7% this year, down from a projection of 2.1% in December. Fed Chair Jerome Powell warned that tariffs are muddying the inflation outlook.
When Bank of Canada officials cut interest rates earlier in March, officials warned that “monetary policy cannot offset the impacts of a trade war.” In a speech last week, Bank Governor Tiff Macklem warned that “depending on the extent and duration of tariffs, the economic impact could be severe. The uncertainty is already causing harm.”
JPMorgan economists recently raised their probability for a US recession to 40% as a result of trade policies. Goldman Sachs economists shaved their 2025 US growth forecast to 1.7% from 2.2%. At Morningstar, senior US economist Preston Caldwell writes that “higher tariffs would unambiguously reduce real GDP.” In his estimation, a full implementation of the tariffs Trump proposed in his campaign will reduce the long-run level of US GDP by 1.6%, and even a watered-down version will reduce growth by 0.32% over the next three years.
According to a recent survey by the London-based Center for Economic Policy Research, a clear majority of 32 economists surveyed believes US tariffs will reduce EU growth by less than 1 percentage point over the next four years.
Meanwhile, in its latest economic outlook, published March 17, the Paris-based OECD downgraded the prospects for global growth this year and next, including a sharp hit to activity in the US, Canada, and Mexico. It cut its global GDP growth forecast to 3.1% from 3.3% for 2025 and to 3.0% from 3.3% for 2026. Basing its projections on the assumption that the US will confirm tariffs on Canada and Mexico in April (and that they will be bilateral), the OECD expects Mexico to be pushed into a deep recession in 2025, and for Canada’s GDP to grow by 0.7% in 2025 and 2026, cutting its previous estimate by 1.3 percentage points.
Further fragmentation of the global economy is a key concern. The OECD highlighted that “higher and broader increases in trade barriers would hit growth around the world and add to inflation,” and that “higher-than-expected inflation would prompt more restrictive monetary policy and could give rise to disruptive repricing in financial markets.”
Michel Saugné, chief investment officer at La Financière de l'Échiquier, says, “It is therefore very likely that the US economy will slow down significantly in the short term, dragging the global economy down with it.”
From Confidence to Pessimism on US Stocks
In November 2024, Trump’s victory in the US presidential election was taken as a positive for US stocks and a negative for Europe and emerging markets, particularly China. “The market consensus seemed to be that the benefits of deregulation and tax cuts would outweigh any price rises from the implementation of tariffs,” explains Federated Hermes investment specialist Hugh Shepherd.
However, this year has been seen the exact opposite. US equity markets have been underperforming as escalating trade tensions and economic uncertainty have left investors on edge. “The so-called Trump trades have unwound one by one: bitcoin, small cap, even banks and deregulation plays,” says T. Rowe Price Investment Institute head Justin Thomson. “The underlying tenor of the market has become defensive, with defensive sectors outperforming and cyclicals underperforming.”
Since Trump’s inauguration on Jan. 20, European and emerging markets (especially Chinese technology stocks) have performed exceptionally well. For example, European stocks barely flinched when Trump threatened a 25% hike on European imports, including autos. “Markets outside the US are advantaged by a lower valuation starting point, as well as potentially positive fiscal impulse in Europe and China,” Thomson explains.
Steven Bell, chief EMEA economist at Columbia Threadneedle Investments, says that “investors became overinvested in the US, and the valuation gap with other markets went too far. Europe generated much better-than-expected earnings in Q4 2024, and Germany is planning a dramatic change in fiscal policy which have notably improved its economic prospects.”
Non-US markets have performed better for reasons beyond trade policy. Trump’s approach to the Ukraine War led to a reassessment of European defense spending. Germany broke its longstanding commitment to low debt and significantly boosted government spending. “US policy appears to have triggered additional domestic stimulus in China and Germany, and those markets have responded,” says Mark Haefele, chief investment officer at UBS Global Wealth Management.
“The good news in all this is the positive catalyst that Trump represents for European unity,” says Saugné. By contrast, the dramatic changes in US policy are generating uncertainty domestically, as the new administration has made it clear that it is willing to tolerate weakness for now in the economy and markets in pursuit of its long-term aims.
“Higher tariffs could increase costs for US consumers, and an expanding fiscal deficit could elevate bond yields and keep interest rates higher for longer. This could drive up borrowing costs for US companies, adding to the US government’s interest expense, which in turn could further squeeze government spending,” Shepherd explains.
A Period of Elevated Uncertainty
Fund managers say one challenge is the difficulty of pinpointing Trump’s intentions. Shepherd expects “a period of elevated uncertainty.” While it is perhaps easier to predict the cards Trump will play in economic relations with Asian countries and Mexico, it is nonetheless “very hard to know what deal will ultimately be struck. We expect many countries to seek to work with the US on mutually beneficial trade deals. We are prepared for an elevated phase of uncertainty regarding trade relations between the US and the rest of the world, but we don’t believe this will continue indefinitely.”
Still, many adverse scenarios seem possible. “The worst-case scenario could involve a protracted trade conflict, leading to increased inflation, disrupted supply chains, and retaliatory measures from trading partners, which could negatively impact global economic stability,” explains Thomson. “As the world’s dominant economy, a US recession would negatively impact markets globally.” He believes the US/Canada/Mexico tariff spat may be short-lived, while those with China are likely to be drawn out. “The trade war has already done too much damage. Uncertainty kills investments, inflation expectations kill consumer confidence, and the labor market tips into the recession phase.”
Trade War Worries Lead To Caution
“Portfolio managers are taking a more defensive stance,” Thomson says.
Shepherd believes it’s important to consider potential second-order impacts: currency devaluations, domestic stimuli, and new geopolitical alignments. He says, “We remain focused on businesses with clear competitive advantages with low leverage, which benefit from secular trends, and which are at reasonable prices. For example, in our portfolio allocation, we have stayed away from companies that rely heavily on exports from China to the US because of the acute risks they potentially face.”
Saugné is braced for volatility: “We expect significant market disruptions by the summer and are hedged accordingly. We also believe that good geographic risk diversification is more than necessary in this new environment, which should continue to favor European and Asian markets.”
Bell says: “Our stock pickers with a global focus are underweighting US equities and have invested in some Chinese companies for the first time in a while, not because of any asset allocation decision, but because they have found attractive companies at reasonable prices outside the US.”
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
Correction: (March 25, 2025): A previous version of this article misspelled the first name of Bank of Canada Governor Tiff Macklem.
