In just a few short months, the tariff story has taken twists and turns of Dickensian proportions, and investors in the stock and bond markets have been on edge, awaiting the next revelation. The rapid pace of new policy, reversals, exceptions and retaliation has created short-term volatility, but what types of long-term outcomes could we see?

The Current Landscape

President Trump’s administration has implemented wide-ranging levies across countries and sectors, from the 10% baseline tariff affecting most nations to 25% on steel and aluminum and rates as high as 145% on Chinese imports. Recent agreements demonstrate the fluid nature of these policies: The U.S. and China suspended most Liberation Day tariffs for 90 days, reducing U.S. tariffs on Chinese imports to 30%, while the U.K. secured exemptions for steel and aluminum alongside reduced automotive tariffs of 10% (down from 25%) for up to 100,000 vehicles.

These developments suggest that while the initial announcements created market disruption, negotiations are active and outcomes are far from predetermined.

Best-Case Scenario: Negotiations Advance U.S. Interests

In the most favorable outcome, Trump’s tariffs prove to be effective negotiating tools rather than permanent policy fixtures, with the administration securing bilateral agreements that preserve international commerce while winning concessions that address trade imbalances.

Companies facing supply chain disruptions would see costs normalize as exemptions expand. Technology firms might particularly benefit from stronger intellectual property protections, while domestic manufacturers could retain competitive advantages. Equity markets would stabilize, and inflation would remain manageable through widespread exemptions.

Oxford Economics suggests this scenario could boost global GDP growth by 0.1% in 2025 and 0.3% in 2026.

Worst-Case Scenario: The Trade War Escalates

A breakdown in negotiations could lead to reciprocal tariff escalation and supply chain disruption, with average effective U.S. tariff rates potentially reaching 35% if the 90-day suspension periods expire without resolution. This would represent the highest level of average tariff rates in 125 years.

Manufacturing firms dependent on cross-border components—particularly automotive and technology sectors—would face sustained margin pressure. Car parts typically cross U.S., Mexican and Canadian borders multiple times before final assembly, making these industries especially vulnerable. Companies like Adidas and Mattel have already announced they will pass higher costs to consumers, while other retailers have begun showing tariff surcharges on purchases of imported goods. Some behavioral shifts are already evident as well. For example, travel from Canada has declined 75%.

Oxford Economics projects U.S. GDP could fall as much as 6% below its current trajectory (and into recession) by the end of 2026 under severe escalation—three times the global impact. Business investment could contract quickly, while unemployment might rise from 4.2% to 5% by 2027. This stagflationary environment would make it difficult for the Federal Reserve to promote stability through rate cuts.

Middle Ground: Managed Disruption

The most probable outcome likely falls between these extremes, involving some sustained trade friction with selective agreement-making. Regional trading blocs may strengthen as countries seek alternative arrangements, while bilateral negotiations continue on a case-by-case basis.

This scenario would create winners and losers across sectors and geographies, with companies adapting their operations and supply chains and potentially gaining market share from less flexible competitors

Investment Implications

The wide range of potential outcomes reinforces the importance of diversifying portfolios so that they have the potential to benefit from various scenarios. We believe the following strategies make sense in the current environment.

Sector diversification: Maintaining exposure across both domestically focused and internationally oriented companies can help provide balance. Some sectors may benefit from reshoring trends, while others may thrive as trade agreements emerge.

Geographic balance: While U.S. equities may benefit from domestic policies, foreign diversification remains valuable as companies in other regions of the world adapt and potentially create new opportunities.

Quality focus: Companies with strong balance sheets, flexible operations and adaptive management teams are better positioned to navigate policy uncertainty regardless of outcomes.

Patience with volatility: Trader reactions to policy announcements have been swift and sometimes severe, but historical precedent suggests that the U.S. stock market prices in risks and rises over longer-term periods.

Preparing for the Unknowable

While tariff policy introduces near-term uncertainty, the evolving nature of agreements with China and the U.K. plus the ongoing negotiations with other partners suggests that it will be some time before we have clarity. Until then, we want to make sure you are progressing toward your investment goals. Instead of attempting to predict specific policy directions (which has proved very difficult with this administration), maintaining a disciplined, diversified investment approach allows portfolios to potentially benefit from positive developments while seeking to mitigate risks during challenging periods.

We believe the current environment will reward patience and strategic positioning over reactive decision-making. This has played out over the last month, with the S&P 500 gaining nearly 19% (before reinvested dividends) since its early-April low, for example.

That said, if the unpredictability of the market is causing you to lose sleep, speak to your advisor. With the recent gains, we’ve been afforded the flexibility to take some risk off the table as appropriate.