Beyond the Noise: Positioning for Growth Amid Trump Tariffs and Recession Fears

In today’s markets, it seems like the volume of noise has never been higher. Headlines scream about recession risks, policy uncertainty, and market bubbles, creating a constant hum of distraction. But as experienced investors know, the key to long-term success is not reacting to every fluctuation – it’s distinguishing signal from noise.

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MACROECONOMIC UNCERTAINTY: THE STATIC IN THE MARKET

Trump Tariffs

Trump’s recent tariff announcements have sent shockwaves through the markets, with the S&P 500 and Nasdaq sliding into a market correction, down 10% from all-time highs in February. Trade wars and tensions with NATO allies have injected fresh volatility into markets, with rising inflation expectations and recession fears driving this sell-off in US equities. But is this reaction deserved, and what does it mean for portfolio asset allocations? The sheer volume of speculation surrounding these developments can obscure the actual impact – creating more static than signal.

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The sharp rise in US tariffs on goods from major trade partners (notably China, Canada and the EU, which account for over 40% of imports into the United States) will likely lead to higher input costs, fuelling inflationary pressures and risking big shocks in very integrated supply chains. Luckily, the current administration has abandoned the idea of imposing universal tariffs to all trading partners, instead opting for a reciprocal tariff approach, whereby the US would match the import duties imposed by other countries. This change means that tariffs will likely be less severe than originally anticipated, although enduring uncertainty around future tariffs will likely lead to higher levels of volatility for longer. In other words, while the short-term market reaction is loud, the longer-term implications may be more muted.

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The most impacted companies are likely to be those most heavily reliant on global supply chains, in sectors like manufacturing, agriculture, export-driven industries and import-sensitive consumer goods. The Automotive industry has been particularly affected by recent tariffs, as increased production costs will likely lead to higher consumer prices, despite the temporary tariff exemptions for the US Automotive industry. There are both challenges and opportunities for US tech companies and those involved in domestic infrastructure; On the one hand, the increase in innovation and self-reliance will create growth opportunities, while disruptions to global supply changes could carry significant risks. Companies with the strongest domestic supply chains and those that can react quickly to leverage new government incentives will likely come out on top.

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Recession fears

Unlike in 2022, where recession fears were softened by a strong labour market, high levels of consumer savings from pandemic-era government transfers, and households were able to refinance their mortgages at low rates, today the picture is no longer as rosy.

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The University of Michigan’s Survey of Consumers preliminary results for March reveals another drop in consumer confidence, down 22% since December 2024, and at its lowest point since 2022. This dip in consumer confidence is not the only indicator to rear its head, as YTD layoffs are the highest they have been since 2009, COVID-era consumer savings have all but disappeared, and there has been a steady rise in credit card and auto loan delinquencies since the end of the pandemic. Finally, the Federal Reserve’s favourite recession indicator, the feared ‘inverted yield curve’ has reappeared. Nevertheless, while these figures seem concerning, they do not paint a full picture. In a market flooded with bearish headlines, not every negative datapoint is a signal – many are just echoes of past fears.

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Despite the decrease in consumer confidence, consumer spending, which is a leading recession indicator and currently represents approximately 70% of the US’ GDP, shows no signs of dropping. Consumer sentiment should not be ignored, but it is also not a sure sign of a recession – high inflation in the last few years has consistently contributed to low consumer confidence, but did not reflect in household spending habits. The labour market is staying strong despite having softened since its highs during the pandemic: the job vacancy rate in the US is now at 4.6%, while the unemployment rate is at 4.1%. It is important to keep in mind that the US economy has never entered a recession when the job vacancy rate has been above the unemployment rate. While rising levels of delinquencies are troubling, the overall private sector debt service ratio is low and has not seen a sharp rise. This is in part due to companies shifting towards longer-duration fixed rate debt as opposed to floating-rate during the pandemic. Furthermore, unlike during the period preceding the GFC, blue-chip companies have strong balance sheets, and banks are well capitalised.  This provides some strength to the economy, and suggests that even if a recession comes, it is less likely to be devastating. While the yield curve has inverted, meaning the 3-month note has surpassed 10-year Treasury yield, which has historically suggested a higher probability of a recession in the following 12-month period, it has been an unreliable indicator of a recession in the last few years. It was inverted in October 2022, but has not led to a recession, even 2 and a half years later.  Amid the market’s echo chamber, it’s crucial to question whether traditional indicators remain as predictive as they once were.

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High valuations in US equities, sector concentration and structural market changes

Despite the recent sell-off in the S&P 500, US stocks are still trading at historically high valuations, with a Shiller PE ratio of 35 as of writing this article (compared to a historical average of 17.2). This has been raising some questions about the continued growth potential of the US equity market, as it is getting increasingly unlikely that companies will be able to exceed such high earnings expectations. In an environment dominated by headlines celebrating record highs and growth stories, the line between meaningful insight and background noise has become increasingly blurred.

Over the last few decades, there have been significant structural changes in the US stock market, as it has moved away from Industrials and Energy to Technology. In 2010, Exxon Mobil was the largest company in the S&P 500, and only four tech companies were in the top 10. Today, the only non-tech companies in the top 10 are Berkshire Hathaway and Eli Lilly. The S&P 500 has become much more concentrated, as the top 10 companies’ share of the market increased from under 20% to nearly 40% between 2010 and 2024. We cannot mention this rise in market concentration without focusing on the ‘Magnificent 7,’ which returned 45.5% in 2024, compared to only 15.9% from the rest of the S&P 493. The top 10 companies account for nearly 70% of the economic profit of the entire index.

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This increased concentration poses several risks for investors, as well as the broader financial system. The first and main risk is the reduced diversification in the S&P 500, which makes portfolios more susceptible to volatility, not only because of the outsized proportion the Magnificent 7 in the index, but also because it is so highly concentrated in technology that a shock to that sector has the potential to erode the value of the entire index. There are also systemic risks to high market concentration, as the financial health of few companies are critically tied to overall market stability. Finally, there are increasing risks of regulatory intervention for the market leaders, in the form of antitrust concerns, data privacy and tax practices. While these risks are substantial, investors can mitigate them by diversifying across various sectors and asset classes, with a focus on long-term growth.

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A HISTORICAL PERSPECTIVE: TURNING INTO THE RIGHT FREQUENCY

Historical perspective

Stock markets are well known to have periods of overperformance, as well as periods with high volatility and uncertainty. Despite these short-term fluctuations, the long-term trajectory has always held steady, summarised by the phrase ‘the trend is up and to the right.’ Since 1957, the S&P 500 has returned an average of 10% p.a. In hindsight, much of the panic that surrounds market downturns often turns out to be just that—panic. When the volume of fear is turned up, it's easy to lose sight of the bigger picture. But tuning out the background chaos and staying invested has consistently proven to be a more effective strategy than trying to outsmart every dip. To illustrate the power of staying invested in the market throughout cycles, consider these scenarios:

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If an investor had only invested equal sums at the highest market peaks, right before the worst bear markets of the last 50 years (the 1973 oil embargo, Black Monday in 1987, the Dot Com Bubble in 1999, the GFC in 2007, etc.), he would still have received an annualised return close to 7% by remaining invested.

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Meanwhile, an investor who only invested when overall valuations were low would suffer significant opportunity costs by holding cash, missing out on the compounding benefits of being fully invested. A Franklin Templeton study has shown that missing out on just the 10 best days in the last 20-year period would have reduced returns by 63%.

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Some analysts have rightly pointed out that this point can be inverted, to say that missing the 10 worst days of the market is more impactful to returns than the opportunity cost of missing the best days. However, as both the best and worst days typically occur during bear markets (due to increased volatility), this rebuttal holds little value in practice.

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These examples illustrate the critical message that staying invested in the market over a long timeframe, rather than trying to time the entry and exit of positions based on valuations, will more often than not lead to better outcomes.

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Opportunities in volatility

Market pullbacks and higher volatility, while uncomfortable in the short term, have historically presented compelling entry points for investors with a disciplined, long-term approach. Periods of market stress often reveal undervalued assets or provide opportunities to rebalance portfolios at more attractive prices. While timing the market is not advisable, tactical allocations – shifting asset allocations in a portfolio to take advantage of short to medium term conditions – can help smooth returns and protect downside risk from volatile public equity markets.

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Advances in AI and new applications of the technology could exert a mitigating force on slumping markets, provided the productivity gains from the technology prove higher than expected. Chat GPT has been dubbed the ‘storefront of AI’, while hidden industries like industrial automation, defence, logistics, and biotech will likely capture most of the true innovative disruptions. The tailwinds from AI are already being felt in different sectors and across asset classes, for example in private infrastructure, as demand is rising sharply for increasingly sophisticated onshore data centres for LLM training purposes. However, much of the ‘hype’ around AI has already been priced in the market, especially in large corporate (as evidenced by the Magnificent 7’s continued dominance). Nevertheless, if history is anything to go by, the true winners of the AI race will only reveal themselves in time, as was the case in the Dot com boom of the late 90s.

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One of the biggest pitfalls for investors in times like these is allowing emotions to dictate investment decisions. Selling in panic during downturns locks in losses, while buying again in euphoria at market peaks leads to overpaying for the same assets. Working with financial advisors, such as EW&L, can help create a layer of safety between emotional impulses and market trends – allowing clients to focus on achieving their long-term goals underpinned by a clear sustainable plan, rather than short-term market sentiment.

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WHERE TO FROM HERE? FILTERING THE SIGNAL

European equities

With the historically high valuations of US equities, many investors are tempted to flock to European stocks, as their valuations were battered by record underperformance compared to the US in 2024, making them seem more compelling at these current prices. Hope around the end of the Ukraine war has also bolstered investor sentiment, and the US military assistance pullback has reinvigorated European Defence companies. However, the recent uplift in European equity markets may be the result of the front-running of imports ahead of the hit from US tariffs and could not only prove to be transitory but turn into a headwind towards the second half of this year. Furthermore, much of the good news surrounding increases in defence funding has already been priced into the market. This rally, while gaining traction in the media, may prove to be just another reverberation in a feedback loop of market noise—decoupled from long-term economic trends. For these reasons, jumping on the bandwagon of European Equities at this stage may not be a wise decision. EW&L remains overweight in European Infrastructure Equities, where we see structural tailwinds stemming from EU investment and higher than normal inflation, which is improving earnings for the inflation-linked revenue streams in this sector.

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Fixed Income

Fixed income has been a relatively unloved asset class over the past decade, as ultra-low interest rates have been a drag on returns. However, shifting monetary policies, higher inflationary pressures, and rising fears that equity markets have peaked, have convinced an increasing number of investors to reconsider their stance on this asset class. As central banks around the world have increased interest rates to combat inflation, investment-grade corporate bond yields have rebounded from historic lows of around 2% before 2022 to just over 5% today. The resurgence in yields offers investors a more attractive risk-adjusted return, while also acting as a buffer against equity market volatility. Within fixed income, there are also different investment options that cater to investors’ risk tolerance.

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High-quality investment grade (IG) bonds can serve as a stabilising force within a diversified portfolio, providing consistent income streams and preserving capital. On the other hand, with current yields around 7%, high-yield bonds can provide enhanced income and diversification benefits in exchange for increased risks. While these bonds carry a higher default risk compared to IG bonds, their appeal lies in their relative insulation from the equity market’s louder swings. They offer comparable returns to equity markets but with lower volatility and a low correlation to both equities and IG bonds. With corporate balance sheets in good shape, especially post COVID refinancing at low rates, default rates for companies issuing these lower quality bonds have remained low. According to credit rating agency Moody’s, high-yield companies are outperforming the market, with an expected probability of default of 3.3%, under its historical average of 4%. Nevertheless, to minimise risk with high-yield bonds, it is advisable to prioritise actively managed funds with a large number of underlying securities. In a world where headlines often distort risk, fixed income offers investors a steadier rhythm – one that rewards patience and discipline over reaction.

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Private markets

While public markets are often dominated by headlines and rapid sentiment shifts, private markets offer a quieter, less reactive environment—better suited for identifying long-term value. Private markets have seen a surge in popularity in the last few years, as fund managers have expanded access to attract wholesale clients, often by offering more attractive fund structures that offer lower lockout periods and higher access to liquidity. Private Equity, Private Credit and unlisted real estate or infrastructure investments can provide diversification benefits and the potential for higher returns, at the expense of liquidity.

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In the current environment, Private Equity managers can take advantage of niche growth opportunities, especially in sectors benefiting from AI tailwinds or shifts in global supply chains and can also capitalise on companies with distressed valuations. PE firms can drive strategic improvements in the companies they invest in, through restructuring and modernising, which often leads to significant performance enhancements. While the inherent illiquidity of Private Equity could put some investors off, it has its place in a diversified portfolio, where it can drive returns over a long investment horizon and further contribute to diversification and risk management.

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Private credit has quietly stepped into a vacuum left by traditional lenders—a shift largely missed in the noise surrounding rate hikes and equity market moves. In the wake of tighter banking regulations since the GFC and beyond, private credit has taken an important role in the market, by providing debt financing to companies and sectors that the major banks are no longer able or willing to service. Private credit funds typically offer higher yields than traditional fixed income, as they can offer funding tailored to the specific needs of the creditors, as well as impose their own restrictions or covenants, thereby decreasing associated risk. Private debt encompasses direct lending, mezzanine financing, distressed debt, asset-backed lending, special situations credit and more. Each of these categories have their own unique risk/return characteristics and including a range of these sub-asset classes within a private credit exposure is a prudent strategy, as it can spread the risk and reduce potential drawdown. Although Private credit carries similar liquidity constraints to PE, its low correlation to public markets provides valuable diversification benefits, especially in times of increased volatility.

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Unlisted infrastructure and real estate are two other asset classes that are uncorrelated to most others, and potentially stand to benefit from both technological shifts as well as government onshoring incentives. Unlisted infrastructure includes assets like toll roads, energy grids and data centres, and offer a unique blend of stability and growth potential. These assets are characterised by their long-term, inflation-linked cash flows and play an essential role in supporting wider economic activity. As such, they are likely to benefit from both public as well as private funding. Unlisted real estate provides similar benefits, including both capital appreciation and income. It includes investments in commercial and residential properties, as well as industrial facilities, which provides similar benefits to infrastructure as they are also linked to inflation – rental income and property prices tend to rise alongside increasing price levels. While these assets suffer from the same liquidity constraints as PE and private debt, they are differentiated and offer further diversification benefits and low correlation to other asset classes. For investors looking to balance the volatility and distractions of public markets, private assets offer clarity—grounded in fundamentals, and insulated from the echo chamber of short-term speculation.

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CONCLUSION: CUTTING THROUGH THE NOISE

Markets will always generate noise—it’s an inherent part of investing. The challenge is not to eliminate it, but to ensure it does not drown out the critical signals that drive long-term performance.

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“Volatility is a feature, not a bug of Trump 2.0.” In an environment characterised by policy uncertainty, recession worries, and ongoing structural changes in the market, investors should accept volatility as part of the new normal. Rather than letting fear dictate investment decisions and cause panic selling, a better approach is to take a long-term view and proactively reposition investment portfolios to mitigate against downside risk and high volatility, while staying alert to emerging opportunities. Diversification across and among asset classes, as well as across sectors and geographies can also help insulate investors from excess volatility. Volatility can also create mispricing and opportunities for long-term investors to purchase assets at low valuations. At EW&L, we have been proactively following this approach and systematically de-risking our clients’ portfolios, which has resulted in reduced drawdown compared to the wider market.

The current investment landscape is rife with both challenges as well as opportunities. While US equities remain overpriced by historical standards, and concentrated in a handful of tech companies, other asset classes like fixed income and private markets offer compelling investment opportunities. Fixed income can provide stability from volatile equity markets, while private market investments add further diversification and a potential for stronger returns. PE managers can leverage AI-driven efficiencies, while private credit funds are attractive for their higher yields compared to public fixed income. Unlisted infrastructure and real estate stand to benefit from public investment and technological advancements, and their inflation-linked revenue streams are welcomed by many investors.

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Those who can take a long-term view, stay disciplined among the current chaos, and strategic with their allocations, will be well positioned to weather the volatility and capitalise on emerging opportunities. By focusing on the fundamentals and embracing diversification, investors can maintain clarity amidst the market’s constant static, ensuring they don’t miss the opportunities hidden below the surface.