Equity markets defy expectations, continue to weather ‘tariff’ noise

Yasmine Raso

Senior Journalist, Financial Newswire

15 July 2025

Equity markets have continued to upend expectations of a slump in the face of persisting tariff-fuelled volatility and instead gone on to hit all-time highs.

The latest market commentary from global investment manager, Principal Asset Management, suggested investors have been able to look beyond trade policy – given its “limited macro impact so far” – and focus on other elements that could affect ‘economic fundamentals’, such as corporate earnings.

This also comes as the Trump administration has delayed its “self-imposed deadline” yet again to negotiate reciprocal tariffs with over 50 trade partners, a move that has been widely viewed as “willing to soften its stance multiple times to prevent a lasting market sell-off”.

“Despite President Trump’s comments that there will be no further extension after August 1, that is likely not the end of the story,” Seema Shah, Chief Global Strategist at Principal Asset Management, said.

“Trade deals typically take between 18 months to three years to finalise, making deadline extensions and renewed tensions still possible. Ongoing legal challenges also have the potential to limit the staying power of broad-based tariffs.

“Finally, the administration’s liberal use of tariffs as a negotiating tool to extract non-economic concessions means that tariff noise will likely remain a permanent feature of the economic backdrop.

“Even through all the tariff noise, negotiations, legal challenges, and trade spats, we can be certain of three factors:

1. “Tariffs are here to stay. The administration views tariffs as a key source of tax revenue to fund its fiscal expansion plans—tariffs are unlikely to disappear entirely.
2. Peak tariffs are behind us, particularly for China. A return to a 145% tariff on China’s imports would result in a trade embargo between the two nations, sharply raising U.S. recession odds again, making it politically unfeasible.
3. An increased focus on sectoral tariffs. As the administration prioritises reshaping global manufacturing toward the U.S. domestic industrial base, it will likely increasingly pivot to sectoral tariffs. While sectoral tariffs generally take longer to implement, they carry less legal ambiguity than other trade mechanisms, suggesting they have longer staying power.”

As a result of these factors, Principal Asset Management said its baseline expectations include:

1. Global reciprocal tariffs maintained at 10% on average
2. Country-specific universal tariffs on the following countries maintained near current levels: EU 10%, China 30%, Mexico 25%, and Canada 25%
3. Current exemptions (i.e., United States-Mexico-Canada Agreement (USCMA) and energy) maintained
4. Sectoral tariffs broadened to include 25% duties on semiconductors and pharmaceuticals, while 50% duties on steel and aluminium are expanded to copper. The 25% duty on autos is maintained.

This indicates that the average ‘effective’ tariff rate imposed by the US will settle at approximately 17 per cent, the highest it’s been since the 1930s.

Shah said this could present some challenges for the US dollar, but might not go as far as to diminish its ‘safe haven’ status.

“While the extension of negotiations through August 1 may suggest that more trade deals will materialise, investors should expect trade barriers to remain higher for the foreseeable future, suggesting there is likely to be some economic scarring. In the near term, risk-on sentiment may need to contend with an economic outlook of slowing growth, elevated inflation, and ongoing policy uncertainty.

“Indeed, even in an optimistic upside scenario where trade hostilities dissipate, the average effective tariff rate is still expected to triple
compared to its level at the start of the year. Beyond the short term, it is worth remembering that market disruptions from policy uncertainty are typically short-lived if companies continue to deliver earnings. In turn, investors should expect continued gains in the S&P 500 if corporate earnings continue to grow.

“For investors, diversification across geographies and sectors will be critical. A weakening dollar could further reinforce the case for continued international exposure, particularly as more active policymaking in other global economies invigorates growth momentum. As with any shock, trade policy volatility should create winners and losers amid increased sector bifurcation, with active management playing a key role in identifying opportunities.

“Overall, despite the narrow range of outcomes with respect to trade policy, investors should not be complacent about risks stemming from abroad and the restructuring of global trade, both in the near term and the longer term.”