The Trump administration’s April 2 tariffs announcement set off a period of heightened uncertainty around trade policy and the broader economic and geopolitical order that could emerge. Markets will likely continue to gyrate based on the developments of tariff negotiations, as well as the evolution of U.S. monetary and fiscal policy.

But as investors evaluate their portfolios and asset allocations, they will encounter a few new paradigms in the coming years. Several of our portfolio managers and economists share their views on the potential implications for the economy, U.S. dollar, stocks and bond markets.

1. The risk premium on stocks will likely be higher

“For global markets, I think higher uncertainty means higher discount rates and probably lower valuations,” says Jody Jonsson, equity portfolio manager and vice chair of Capital Group.

At greatest risk of a derating are U.S. equities, as valuations have been high over the last few years, especially for technology stocks. Coming into 2025, the S&P 500 Index traded at 21.5 times earnings on a 12-month forward price-to-earnings basis. That multiple has shrunk to 18.6 times, slightly above its 10-year average.

“Nobody could argue that the market wasn't expensive heading into this. Obviously, there's winners and losers under the surface, but it may still be a difficult headwind for the market broadly. A derating hits everybody, but some more than others,” economist Darrell Spence says. “In a world of higher inflation, maybe slower growth and deglobalization, do you go back to a P/E multiple of 22? Probably not, but maybe 17, 18 is OK,” especially amid expectations of gains from innovation, advances in healthcare and other areas of productivity.

Consensus earnings projections for S&P 500 companies have dropped by more than 3% over the past four months. Earnings for the S&P 500 are forecast to grow at 10.7% for 2025. Estimates may be cut further as the market digests first quarter earnings reports. Moreover, many companies are delaying their capital expenditure plans until they receive some clarity on policy.

There is a silver lining despite the current market turmoil. “Keep in mind that this has been a policy-driven market decline, not a sell-off due to weak corporate fundamentals like we saw in the dot-com bubble of 2001 or the home mortgage meltdown of 2008,” says Chris Buchbinder, equity portfolio manager. “Weak markets can create great opportunities to buy good companies at even better prices.”  

2. International equities have new catalysts

The recent downdraft in U.S. equities is bringing renewed focus on international stocks. Over the last few years, their cheaper valuations than similar U.S. businesses have been the main argument in favor of international equities. But other catalysts are coming into play.

In the wake of large fiscal stimulus that Germany announced in March, the prospects for growth have improved significantly in Europe’s largest economy. More broadly, member states of the European Union are focused on economic revitalization, in light of a report on competitiveness by economist and former Italian Prime Minister Mario Draghi and increasing trade tensions with major trading partners, such as the U.S. and China.

German equities have been strikingly resilient reflecting improving sentiment about the domestic economy and the wider European outlook. European commercial banks are poised to benefit, as well as a host of companies related to defense.

Overall, valuations are cheaper in non-U.S. markets. Plus, the MSCI EAFE (Europe, Australasia, Far East) and MSCI All-Country World Index ex USA indices are weighted higher in heavy industry, energy, materials and chemicals than the S&P 500. This may help in an environment where infrastructure spending rises.

“Global investing may be coming back into its moment now,” Jonsson says. “People have been singularly focused on the U.S. for the last 15 years. There is an opportunity to invest in a broader market and spread your wings.”

Emerging markets trade at a substantial discount to the U.S. and have growth opportunities in several markets. Take Brazil. Latin America’s largest economy is not subject to high tariff rates from the U.S. As one of the world’s largest producers of agricultural products and commodities, Brazil may find increased trade opportunities with China, which is grappling with exorbitant U.S. tariff rates.   

Taking a page from Japan’s playbook, South Korea wants companies to focus on boosting their return on equity and book value. Potential outcomes could be larger dividends, share buybacks and asset divestitures. For its part, China could be forced to stimulate with stronger measures aimed at unleashing the country’s huge consumer savings stockpile into the property market and overall consumption. 

These factors in emerging markets — many of which trade below their 10-year average on a forward price-to-earnings basis — could drive a higher rerating.  

3. Don’t count the dollar out just yet

A weakened dollar has prompted questions about the U.S. currency’s safe-haven status and whether a longer term structural decline is on the horizon. Capital Group currency analyst Jens Søndergaard says it’s premature to call it a regime shift.

“We’ve seen an orderly decline of the dollar as the carry trade has unwound to an extent. The U.S. dollar has declined 10% from its early January 2025 peak, using the U.S. Dollar Index (DXY) to represent a basket of major developed currencies, but only 5% against a broader index that includes emerging markets,” he said. “In the DXY, for example, some of the relative weakening we have seen of the dollar is due to the relative strengthening of the euro.”

Most of the dollar’s recent softening reflects market participants dialing back the U.S. exceptionalism theme. They’ve specifically downgraded U.S. economic growth prospects, which implies narrowing the gap between U.S. growth rates and interest rates with those of Europe and other parts of the world, Søndergaard says.

“Remember that currency is a two-way phenomenon. As of now, the dollar’s direction is reflecting relative growth in the U.S. versus the rest of the world,” he adds.

In the near-term, differentials in real interest rates suggest we could see another 5% decline in the U.S. dollar. Long term, however, a sustained dollar decline would require a steady rise in growth in the rest of the world.

Capital Strategy Research economist Robert Lind suggests it may not be till 2026 that we see a meaningful growth pickup in Europe, given the near-term impact of tariff uncertainty. China’s economy, another engine of growth worldwide, has yet to show a pick-up in momentum.

4. U.S. economic growth will slow 

U.S. economic growth will likely lose momentum, even as inflation ticks higher amid greater policy uncertainty. Without a shift in the current policy trajectory, recession risks remain in play.

“We have already seen companies pause capital expenditure plans and become more deliberate and slower in hiring — two areas that tend to be expansionary in the economy,” economist Jared Franz says. “As a result, I’ve pulled back my estimates for the U.S. economy and expect it to grow by about 1% to -1.5% this year.

“Overall, my expectation is for slower growth, higher inflation and interest rate cuts that could begin as early as June. To see the forecast improving in the near term, I would need to see signals like tariff deals coming to fruition and fiscal policy decisions on areas like tax cuts coming earlier and faster than anticipated.”

Yet, the economy risks further slowdown the longer uncertainty persists around tariffs. Ongoing market volatility may also prompt the administration to peel back some of its tariff policies. For the current environment to improve, tariff agreements must evolve with less policy uncertainty. Fiscal initiatives from the Trump administration, such as tax cuts, could offset a slowdown in growth, though the timing remains a question.

While the cyclical outlook is cloudy, Franz remains positive on the structural underpinnings of the U.S. economy. Innovation related to artificial intelligence, healthcare and other areas of technology will continue, especially as newer AI models are released. He believes the U.S. continues to have among the most robust innovation ecosystem in the world, and it will continue to provide enhancements that contribute to economic productivity.

5. Bonds will see price adjustment, not a full-blown crisis 

 U.S. Treasury yields have risen amid concerns that slower economic growth could be accompanied by an uptick in inflation. The swift and sharp unwinding of trades by hedge funds has also put pressure on the sector and led to a brief disruption in rates markets. Speculation that foreign investors will diversify out of U.S. assets also led to some pressure on rates over the last few weeks.

Many investors have become concerned about the rising U.S. fiscal deficit and believe that trade protectionism, threats to Fed independence and an unwinding of traditional economic frameworks and alliances could continue to weaken the U.S. dollar and further steepen the yield curve. However, the narrative that there will be a vast exodus out of U.S. Treasuries appears overblown.

It appears more probable that we are seeing a price adjustment, not a full abandonment of the market. Even though the 30-year Treasury may be more volatile, portfolio manager Tim Ng says he expects Treasuries with five- to 10-year maturities will likely reflect near-term Fed policy and should trade in a range around their current levels.

U.S. Treasuries will likely continue to be a store of value. It is still the largest and most liquid government bond market in the world, points out portfolio manager Chitrang Purani.

“There is a lack of large, liquid alternatives for investors seeking to diversify away from Treasuries. It also appears as though the Trump administration is sensitive to moves in the bond market, as they need low and stable rates to support the broad economic transition they intend to enact,” he says. “And other than a brief disruption, market functioning has largely been orderly. Should markets run into further technical difficulties, the Fed has created several tools to provide liquidity and support to financial markets.”

Given greater uncertainty, spreads on credit assets will likely be higher than what we have seen in the post-pandemic period. Even though corporate fundamentals today are solid, weaker economic growth and rising cost pressures could weigh on credit markets. Persistence in demand from captive buyers, like pension funds and insurance companies, could offset some of that pressure. But the fixed income team believes credit spreads could widen and is focused on higher quality assets.

Negative stock bond correlations are also likely to persist. While 30-year Treasuries weakened as stocks fell, five-year and 10-year notes rallied. Overall, the Bloomberg U.S. Aggregate Index is up 2.68% year-to-date through April 25, the Bloomberg U.S. Treasury Index is up 2.95% and the U.S. TIPS Index, which has a longer duration, is up 3.64%.

“Fixed income can still provide a safe haven, but it matters which bonds you own and where you are positioned on the yield curve,” Purani adds.

The bottom line

Markets will remain volatile amid heightened uncertainty around U.S. tariff policies. An extended period of tariff negotiations will likely have a negative impact on the economy, regardless of where tariff rates ultimately settle. As such, our economists expect slower economic growth and an uptick in inflation.

Against this economic backdrop, risk premiums on U.S. financial assets will likely be higher across stocks, bonds and the dollar. Still, many portfolio managers and analysts do not expect a regime shift.

The U.S. remains the world’s largest economy with deep financial markets and checks and balances built into its institutions. Moreover, the lack of many alternatives around the world, whether it is the U.S. dollar as a reserve currency or U.S. Treasuries as a safe-haven asset, provide U.S. financial assets with an underpinning of support.

While incremental investments may flow into other markets, we do not see a wholesale shift, at least in the near term. And some diversification from the U.S. may not be a bad thing. Anemic growth abroad has led to savings from around the world to flow into the U.S., especially into its vibrant technology sector, which has resulted in a high degree of concentration in the U.S. stock market. A broadening of markets would likely bring greater balance to the global financial system. 

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