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The stock market has come a long way in since last April, when U.S. President Donald Trump announced a plan to lift tariffs on countries around the world to the highest levels in a century. U.S. stock prices plunged over several days. Treasuries, normally considered a “safe haven,” also fell in value. Since then, some tariffs have taken effect while others have been delayed, deadlines have been reset, and negotiations with most countries continue. By early July, though, the S&P 500 Index had recovered to reach a new record high, and yields in the bond markets showed stability.
To take a fresh look at the markets and how investors might view tariffs, I held a discussion with two professionals at Franklin Templeton: Michael Salm, a portfolio manager on the Franklin Templeton Fixed Income team, and Kathryn Lakin, Director of Research at Putnam Equity.
Tariffs initially posed a major concern for the markets because the levels were unexpected. The sense in the market was that 10% would be the rate, but the April 2 announcement involved much higher numbers, and with different rates assigned to different trading partners. The overall average was about 40%, and the market panicked for a few days. Markets settled down as it became clear that the announced levels were part of a negotiation, and then many of them were paused for 90 days.
The markets took the time to develop a better quantitative model to be able to analyze the different rates announced for different countries and sectors. Now investors can quickly and efficiently take in changing information and quantify the impact of potential new tariffs. For example, the automobile sector faced a variety of impacts, including tariffs on steel, aluminum and other inputs, in addition to the general tariffs. Consensus earnings estimates came down, and stock performance since then has reflected the revised estimates were largely accurate.
At this time, markets believe the net impact is an increase in tariff levels from an average of about 2% before the announcements to about 15% currently and into the future. Of course, this level could change as negotiations with most countries continue. While there is still uncertainty, market volatility like the moves in April is unlikely because investors have more confidence in their ability to analyze evolving developments. If the ultimate levels are much higher than 15%, it could be negative for stocks, but the market is better prepared for the 15% rate. A lower final rate might be good news for stocks.
It’s also worth noting that a broad range of stocks has participated in the stock market recovery since April. This is a change in trend from the previous two years when the Magnificent Seven (the stocks are Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla) led by a wide margin. The broadening of the rally is a theme that Franklin Templeton Institute has been highlighting in research.
The tariff burden will likely land on consumers, although companies, including U.S. importers and foreign exporters may also absorb some of the costs. Our teams view an effective tariff rate of about 15% as similar to a 3% national sales tax on consumption.
Tariffs are coming in a wide variety, from general duties to sectoral tariffs that are applied to important things like steel, aluminum, copper, or important industries like autos and pharma. Households may experience different effects on their budgets depending on their income and what imported goods they buy. At a macro level, however, it appears that consumer confidence and spending is holding up in spite of the extra costs.
Large corporations approach the situation differently. Equity analysts are seeing them delay major projects, but they are not canceling them, which is positive. Instead, they are waiting until they can better assess where it will be financially advantageous to invest.
In sum, our experts don’t think the tariff impact will be large enough to derail economic growth. They believe gross domestic product growth could dip down to near 1% later this year but then move back to near 2%.
While higher costs naturally prompt fear of inflation, this appears to be less of a risk than some investors initially thought. Levies averaging 15% would, in the team’s analysis, lift overall inflation by about 1.5%, but this would not become a sustained source of price uncertainty.
The U.S. dollar’s drop in value this year is not a major source of concern for our teams. After all, the dollar is coming down from record levels, which means that it is still relatively strong on a historical basis. Also, the cause of the dollar’s decline appears to be related to a significant degree to changes in interest-rate differentials between the United States and our major trading partners. Early on amid the tariff turmoil, some pundits speculated that foreign investors may have been turning away from U.S. markets, but over the past few months there is little sign of a global aversion to US assets.
Diversification is a theme our professionals emphasized. There are attractive opportunities in international markets, and across many sectors of both the stock and bond markets. International stocks, for example, have been performing well this year, with many countries even ahead of the United States, as they benefit in part from their currencies appreciating relative to the U.S. dollar.
Also, several international markets are undertaking major economic changes of their own, including sizable stimulus plans, including Germany, Japan, and Canada. Germany is one of the best examples. It stands out because it had long maintained fiscal discipline with low borrowing. Today, though, they are introducing a plan to spend 70% more on infrastructure and other objectives over the next five years.
In fixed income, diversification is helpful in part as a risk management tool because spreads in general are tight – there isn’t one area or sector that offers exceptional opportunities. High-yield bonds, for example, have not become riskier amid tariff uncertainty, in our view, but there is no reason to favor them, either. Broad positioning across fixed-income sectors and international markets is attractive and would allow flexibility if new opportunities arise.
Our teams indicate that markets are in more stable condition three months into the adjustment to the historic change in tariff policy. Negotiating final trade agreements with countries worldwide will take time and markets are still watching closely, but they have better tools to understand the changing headlines and decisions.
Stephen Dover, CFA, is Franklin Templeton’s Chief Market Strategist and Head of the Franklin Templeton Investment Institute. This article was originally published in Stephen Dover’s LinkedIn Newsletter, July 11, 2025. Follow Stephen Dover on LinkedIn where he posts his thoughts and comments as well as his Global Market Perspectives newsletter.
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