Lacking Certainty, Investors Should Be Patient

Investors are edgy these days, teetering with uncertainty over whether the Trump administration’s tariff policy reflects a negotiation tactic or a means to more substantial global change.

The answer may be a bit of both.

Following the tariff announcement in early April, much of global equity market thinking shifted from an expectation that tariffs were a negotiating tool to encourage free(er) trade to incorporating the possibility that tariffs are a means to restructure the global economy and generate substantial government revenues. Markets are encouraged by the possibility of favorable negotiated outcomes that alleviate some of the tariff pressures, but earnings expectations need to be reduced to reflect—at minimum—some near-term pressures and continued uncertainty.

As markets approach earnings announcement season (April-May), what should investors expect and how might they position their portfolios, given a slowing economy, reduced earnings expectations, and exceptionally high economic-policy uncertainty?

AMG expects this uncertainty to drive a bear market without a recession, (a roughly 20% peak-to-trough decline) as expectations for the economy and corporate profits are reset to lower levels. However, the likelihood of a bear market accompanied by a recession (a longer and deeper decline of 30%) has risen, and while this is not AMG’s current expectation, the fluid nature of policy requires some degree of caution.

For foreign developed markets, the policy mix is more favorable, even as earnings expectations will be revised lower. Foreign fiscal and monetary policymakers are better positioned in the near-term to respond to tariff shocks. This means both foreign stocks and currencies have the potential for less adverse outcomes in U.S. dollar terms. Long-term returns for foreign developed market stocks are appealing, and investors should consider retaining an allocation in their portfolios.

Bottom Line: Investors should be cautious averaging into additional equities, because in the absence of more benign negotiated tariff outcomes, the slowing of economic growth could morph into a recession. That said, do not rush for the exit. AMG expects negotiations over the next few months to bear fruit. The best course of action is patience. AMG does not see a permanent hit to the U.S. corporate profit model, and long-term prospects for the U.S. stock market remain positive. With shifts in the policy mix from unfavorable to favorable, increased allocations to stocks could be on order later this spring or summer. Until then, be patient.