As markets continue reacting to the Trump administration’s tariffs, Michael Zezas, our Global Head of Fixed Income Research and Public Policy Strategy, lists the expected impacts for investors across equity sectors and asset classes.

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Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan Stanley’s Global Head of Fixed Income Research and Public Policy Strategy. Today we’ll be talking about the market impacts of the recently announced tariff increases.

It’s Friday, April 4th, at 1pm in New York.

This week, as planned, President Trump unveiled tariff increases. These reciprocal tariffs were hiked with the stated goal of reducing the U.S.’s goods trade deficit with other countries. We’ve long anticipated that higher tariffs on a broad range of imports would be a fixture of U.S. policy in a second Trump term. And that whatever you thought of the goals tariffs were driving towards, their enactment would come at an economic cost along the way. That cost is what helped drive our team’s preference for fixed income over more economically-sensitive equities.

But this week’s announcement underscored that we actually underestimated the speed and severity of implementation. Following this week’s reciprocal tariff announcement, tariffs on imports from China are approaching 60 per cent, a level we didn’t anticipate would be reached until 2026. And while we expected a number of product-specific tariffs would be levied, we did not anticipate the broad-based import tariffs announced this week. All totaled, the U.S. effective tariff rate is now around 22 per cent, having started the year at 3 per cent.

So what’s next? Our colleagues across Morgan Stanley Research have detailed their expected impacts across equity sectors and asset classes and here are some key takeaways to keep in mind.

First, we do think there’s a possibility that negotiation will lower some of these tariffs, particularly for traditional U.S. allies like Japan and Europe, giving some relief to markets and the economic outlook.

However, successful negotiation may not arrive quickly, as it's not yet clear what the U.S. would deem sufficient concessions from its trading partners. Lower tariff levels and higher asset purchases might be part of the mix, but we’re still in discovery mode on this. And even if tariff reductions succeed, it's still likely that tariff levels would be meaningfully higher than previously anticipated.

So for investors, we think that means there’s more room to go for markets to price in a weaker U.S. growth outlook. In U.S. equities, for example, our strategists argue that first-order impacts of higher tariffs may be mostly priced at this point, but second-order effects – such as knock-on effects of further hits to consumer and corporate confidence – could push the S&P 500 below the 5000 level.

In credit markets, weakness has been, and may continue to be, more acute in key sectors where tariff costs are substantial; and may not be able to pass on to price, such as the consumer retail sector. These are companies whose costs are driven by overseas imports.

So what happens from here? Are there positive catalysts to watch for?

It's going to depend on market valuations. If we get to a point where a recession is more clearly in the price, then U.S. policy catalysts might help the stock market. That could include negotiations that result in smaller tariff increases than those just announced or a fiscal policy response, such as bigger than anticipated tax cuts.

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Our Thematics and Public Policy analysts Michelle Weaver and Ariana Salvatore discuss the top five strategies for companies to mitigate the effects of U.S. tariffs.

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Our analysts Paul Walsh, Mike Wilson and Marina Zavolock debate the relative merits of U.S. and European stocks in this very dynamic market moment.

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Our analysts Arunima Sinha, Heather Berger and James Egan discuss the resilience of U.S. consumer spending, credit use and homeownership in light of the Trump administration’s policies.

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Policy questions and growth risks are likely to persist in the aftermath of the Trump administration’s upcoming tariffs. Our CIO and Chief U.S. Equity Strategist Mike Wilson outlines how to seek investments that might mitigate the fallout.

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Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist. Today on the podcast – our views on tariffs and the implications for equity markets.

It's Monday, March 31st at 11:30am in New York.

So let’s get after it.

Over the past few weeks, tariffs have moved front and center for equity investors. While the reciprocal tariff announcement expected on April 2nd should offer some incremental clarity on tariff rates and countries or products in scope, we view it as a maximalist starting point ahead of bilateral negotiations as opposed to a clearing event. This means policy uncertainty and growth risks are likely to persist for at least several more months, even if it marks a short-term low for sentiment and stock prices.

In the baseline for April 2nd, our policy strategists see the administration focusing on a continued ramp higher in the tariff rate on China – while product-specific tariffs on Europe, Mexico and Canada could see some de-escalation based on the USMCA signed during Trump’s first term. Additional tariffs on multiple Asia economies and products are also possible. Timing is another consideration. The administration has said it plans to announce some tariffs for implementation on April 2nd, while others are to be implemented later, signaling a path for negotiations. However, this is a low conviction view given the amount of latitude the President has on this issue.

We don't think this baseline scenario prevents upside progress at the index level – as an "off ramp" for Mexico and Canada would help to counter some of the risk from moderately higher China tariffs. Furthermore, product level tariffs on the EU and certain Asia economies, like Vietnam, are likely to be more impactful on a sector basis.

Having said that, the S&P 500 upside is likely capped at 5800-5900 in the near term – even if we get a less onerous than expected announcement. Such an outcome would likely bring no immediate additional increase in the tariff rate on China; more modest or targeted tariffs on EU products than our base case; an extended USMCA exemption for Mexico and Canada; and very narrow tariffs on other Asia economies.

No matter what the outcome is on Wednesday, we think new highs for the S&P 500 are out of the question in the first half of the year; unless there is a clear reacceleration in earnings revisions breadth, something we believe is very unlikely until the third or fourth quarter.

Conversely, to get a sustained break of the low end of our first half range, we would need to see a more severe April 2nd tariff outcome than our base case and a meaningful deterioration in the hard economic data, especially labor markets. This is perhaps the outcome the market was starting to price on Friday and this morning.

Looking at the stock level, companies that can mitigate the risk of tariffs are likely to outperform. Key strategies here include the ability to raise price, currency hedging, redirecting products to markets without tariffs, inventory stockpiling and diversifying supply chains geographically. All these strategies involve trade-offs or costs, but those companies that can do it effectively should see better performance. In short, it’s typically companies with scale and strong negotiating power with its suppliers and customers. This all leads us back to large cap quality as the key factor to focus on when picking stocks.

At the sector level, Capital Goods is well positioned given its stronger pricing power; while consumer discretionary goods appears to be in the weakest position.

Bottom line, stay up the quality and size curve with a bias toward companies with good mitigation strategies. And see our research for more details.

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As credit resilience weakens with a worsening fundamental backdrop, our Head of Corporate Credit Research Andrew Sheets suggests investors reconsider their portfolio quality.

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Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Today I’m going to talk about why we think near term improvement may be temporary, and thus an opportunity to improve credit quality.

It's Friday March 28th at 2pm in London.

In volatile markets, it is always hard to parse how much is emotion, and how much is real change. As you would have heard earlier this week from my colleague Mike Wilson, Morgan Stanley’s Chief U.S. Equity Strategist, we see a window for short-term relief in U.S. stock markets, as a number of indicators suggest that markets may have been oversold.

But for credit, we think this relief will be temporary. Fundamentals around the medium-term story are on the wrong track, with both growth and inflation moving in the wrong direction. Credit investors should use this respite to improve portfolio quality.

Taking a step back, our original thinking entering 2025 was that the future presented a much wider range of economic scenarios, not a great outcome for credit per se, and some real slowing of U.S. growth into 2026, again not a particularly attractive outcome.

Yet we also thought it would take time for these risks to arrive. For the economy, it entered 2025 with some pretty decent momentum. We thought it would take time for any changes in policy to both materialize and change the real economic trajectory.

Meanwhile, credit had several tailwinds, including attractive yields, strong demand and stable balance sheet metrics. And so we initially thought that credit would remain quite resilient, even if other asset classes showed more volatility.

But our conviction in that resilience from credit is weakening as the fundamental backdrop is getting worse. Changes to U.S. policy have been more aggressive, and happened more quickly than we previously expected. And partly as a result, Morgan Stanley's forecasts for growth, inflation and policy rates are all moving in the wrong direction – with forecasts showing now weaker growth, higher inflation and fewer rate cuts from the Federal Reserve than we thought at the start of this year. And it’s not just us. The Federal Reserve's latest Summary of Economic Projections, recently released, show a similar expectation for lower growth and higher inflation relative to the Fed’s prior forecast path.

In short, Morgan Stanley’s economic forecasts point to rising odds of a scenario we think is challenging: weaker growth, and yet a central bank that may be hesitant to cut rates to support the economy, given persistent inflation.

The rising risks of a scenario of weaker growth, higher inflation and less help from central bank policy temper our enthusiasm to buy the so-called dip – and add exposure given some modest recent weakness. Our U.S. credit strategy team, led by Vishwas Patkar, thinks that U.S. investment grade spreads are only 'fair', given these changing conditions, while spreads for U.S. high yield and U.S. loans should actually now be modestly wider through year-end – given the rising risks.

In short, credit investors should try to keep powder dry, resist the urge to buy the dip, and look to improve portfolio quality.

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