Financial markets have notably been volatile since Trump’s inauguration on 20th January and has recently spiked following tariff announcements made yesterday. This is an update on the impact of these tariffs on U.S. equities and some context on the global economy.

• Despite increased policy uncertainty from the Trump administration, the global outlook remains broadly constructive. Recent tariff announcements affect goods only. Global trade in capital, services, information and people will remain sustainable, supporting productivity and global economic growth over the long term. These mega trends will outweigh Trump disruption. 
  
  
• Implied S&P 500 earnings growth for 2025 has been erased by the Trump tariff announcements unfortunately. We estimate the outcome of average global tariff rates of 20% will reduce earnings per share growth on US shares by up to 8%, including retaliations. It is estimated that the S&P 500 will be around 5,500 by end of year so the US equity market is now fairly valued (not under-valued anymore).
  
  
• The US Fed is not likely to reduce interest rates in 2025. US CPI may reach 4.50% later this year due to the effects of tariffs on the US economy before offsets take effect later.
  
  
• US GDP output is expected to slow to 1.5% in 2025. Recession will be avoided if tariff revenue is recycled back into the US economy (to consumers). We assume these revenues will be mostly recycled and the retaliation modest. However, if all revenue received from tariffs goes into reducing their current account deficit (this amounts to a fiscal tightening by 2%), then a US recession is likely, although probably shallow.
  
  
• The US dollar has fallen recently due to expectations that tariffs will hurt the US economy more that the rest of the world.
  
  
• Asian economies have been hit hardest, tariffs on Chinese goods is now up to 54%. China’s output is estimated to fall by 1%, but their economy is expected to be supported by looser fiscal policy and still grow 4%.
  
  
• Equity markets are expected to rebound in 2026 after the recent sell off once the offsets (e.g. currency, CPI readings and improving sentiment) take effect.
  
  
• Australia is not a big exporter to the US, it is around 5% such as alumina and copper, meat (mainly beef), pearls, pharmaceutical and medical products. The majority of exports from Australia are sent to Asia where we have established free trade agreements with China (85% duty free) and Japan (tariff exempt). 

As mentioned in previous articles, good quality diversified portfolios should have access to Australian share franked dividend income, an allocation to defensives (such as cash, bonds and shorter duration credit) and exposure to alternatives like private or unlisted assets that offer non-correlated market returns, reducing volatility.

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For assistance or more information, please contact Lantern Advisory on (07) 3002 2690 or via info@lanternadvisory.com.au.