Not out of the woods yet

As we move further into spring, we can take comfort that some fears of recession have receded as tariff pressures have eased. Yet the new regime still poses significant risks to growth that call for a cautious stance in portfolios, and vigilance around the real economy.

Since our last note, there have been a number of developments across markets that reinforce our central message: while conditions are improving, this remains a challenging environment that requires caution and balance.

The economic impact of tariffs continues to filter through the system, with Walmart – the largest retailer in the United States – confirming it will need to pass on most of the cost increases to consumers. With tariffs on some goods at 17.5% and operating margins of just 4%, there is limited scope to absorb such pressures. President Trump’s response, suggesting that the company should simply take the hit to its profits, is not grounded in commercial reality. For large retailers with slim margins, that’s a tall order – and ultimately, the consumer bears the brunt.

Adding further complexity to the picture was Moody’s decision to downgrade US government debt, making it the last of the major rating agencies to strip the US of its coveted AAA status. While these actions have often been dismissed politically, they do carry weight. Higher bond yields and increased borrowing costs for the US government are an inevitable result – and ironically, this may act as a constraint on Trump’s ability to place further aggressive tariff measures.

Meanwhile, the Federal Reserve chose not to cut interest rates at its most recent meeting – a signal that, beneath the surface, the US economy retains a degree of resilience. Labour markets have remained sticky, and post-pandemic dynamics have changed the way companies respond to downturns. Having struggled to rehire after the pandemic, many firms are now reluctant to reduce headcount, helping sustain consumer confidence and economic activity.

In response to the turmoil, fixed income markets have been volatile, with government debt lagging riskier securities such as convertibles and high yield credit.

Equity market behaviour over the last few months highlights the value of maintaining a broad exposure across global markets, with slightly less focus on the US and greater emphasis on higher quality assets. Market shocks, even those that appear novel, tend to follow familiar patterns. As ever, it is discipline, diversification and a measured approach that are most likely to deliver success over time.