Working Through Uncertainty

President Trump surprised many earlier this week when he announced the imposition of 25% tariffs on auto imports, including components such as engines, transmissions and powertrains. For autos assembled in Canada or Mexico, the tariffs would apply to non-U.S. parts. The implications of this policy are broad: Nearly half of autos sold in the U.S. are imported, and reports suggest that approximately 60% of parts used in the assembly process are imported as well. Even for vehicles with final assembly in the U.S., the Department of Transportation’s American Automobile Label Act data reveals that at least 15% of parts come from outside the U.S. While the intent is to bring manufacturing back to the U.S., the reality is that ramping up production may take years as well as billions of dollars of investment. Further, it remains to be seen whether U.S. manufacturers would sign up for such expensive long-term investments when policy may change over time.

It is likely that the most immediate impact of the tariffs will be to raise prices and curtail demand, which many fear could lead to industry-wide job losses. On the price front, Reuters reports that while some luxury manufacturers are confident they can pass prices onto consumers, more mainstream automakers may have a harder time passing on the full brunt of the tariff increase. And with margins of 6-8%, it could be difficult to absorb the full impact.

On April 2, a day the administration has dubbed “Liberation Day,” President Trump is expected to formally announce reciprocal tariffs. There is, however, confusion as to the extent of this policy given recent comments about potential leniency. Additionally, there is signaling from major trading partners of an openness to negotiate deals. Europe, for example, is reportedly readying the release of a “Term Sheet” outlining potential concessions to tamp down the impact of the planned trade actions. Finally, there are growing questions about the legality of such expansive action. All in all, the uncertainty will continue to drive a “wait and see” approach from American businesses. We have increased tariffs as our base case, which has led us to lower our U.S. growth estimate and increase our inflation forecast for 2025. The extent of the increase in tariffs, however, leaves both a moving target.

Trading in the U.S. looks like a classic “risk-off” day, with equities falling on the day, and week, and Treasury bonds rallying. U.S. equities are ending the week on a very soft note, with particular weakness across the tech-heavy NASDAQ, although the market drawdown has been fairly broad-based. Large cap U.S. stocks are headed toward the worst quarterly performance in three years.

While the broad market is responding to a “risk off” sentiment driven by continued — and heighted — uncertainty over U.S. trade policy, technology stocks have the added headwind of another report signaling Microsoft’s re-setting downward expectations for data center demand that has weighted on AI and AI infrastructure stocks. Market volatility, as measured by the VIX index, has surged nearly 15% during Friday’s session. U.S. Treasury bonds are rallying, with yields falling meaningfully in the longer-dated end of the yield curve. The 10-year Treasury yield has declined nearly 10 basis points, to 4.26%, having hit a high of nearly 4.40% during the week.

Non-U.S. stocks are not immune to the tariff uncertainty, with stocks across Europe and Asia seeing red for the Friday trading session as well, although month-to-date both Developed Ex-U.S. and Emerging Market broad benchmarks continue to outperform U.S. counterparts by a wide margin. European stocks are enjoying a trifecta: An economic fiscal tailwind, relatively attractive valuations (compared to U.S. counterparts) and improving earnings momentum. While earnings estimates for the U.S. have fallen in the first quarter (although they are holding steady for 2025), European estimates are rising.

Investors and policymakers remain awash with data — hard data that reflects actual economic activity as reported through official channels, and soft data that reflects results from sentiment and other surveys taken by consumers and businesses. We have noted the deterioration in some of the soft data, recognizing that sentiment and confidence were both undermined by uncertainty related to the policy outlook. Would the labor market be hindered by DOGE-related actions? Would both growth and inflation be negatively impacted over the near-term given continued trade uncertainty? Uncertainty creates confusion, and confusion can lead to changes in actual activity like consumer and corporate spending and investment. Oftentimes, however, falling sentiment proves a poor leading indicator and does not translate into economic activity. For that reason, we agree with Fed Chair Powell, preferring to “watch what they do, not only what they say.” The “what they do” is the hard data, and the U.S. economy entered 2025 with solid momentum behind the hard data. Strength in GDP, and broad strength in the labor market in particular, have offered a buttress against the falling sentiment data.

That said, we are very much on guard, and we have started to see cracks in the real data coming into the end of the first quarter of 2025. We have adjusted down our outlook for growth as these cracks have been revealed. Recent data shows that real personal spending, adjusted for inflation, inched up a meager 0.1% in February, a lackluster recovery from  January’s decline. Lululemon, for example, seemed to affirm the weakness in their earnings release, noting that the outlook has softened, driven by lower U.S. demand, and highlighted a challenging environment. The hard data also continues to affirm that lower income consumers are struggling. Recently, Cox Automotive reported that vehicle repossessions have jumped to the highest level in 15 years, with roughly 1.73 million vehicles seized by lenders in 2024, up 16% year-over-year and a 43% increase over 2022. There are some signs of strength in the hard data, however: In particular, the labor market continues to offer support, with real-time weekly unemployment claims data showing that the number of Americans applying for unemployment benefits actually fell last week.

Many investors have been waiting with bated breath for the revival of the IPO market, typically viewed as a signal of investor optimism. While there were signs of life in 2024, with increases in both number of IPOs and proceeds raised, generally the IPO market has been moribund since the gangbuster 2021 period, which, according to an E&Y analysis, saw a remarkable 416 deals and $155B of proceeds — this was a year when liquidity was abundant and interest rates were still at rock-bottom levels. Since that time, there has been a slow recovery from the 2022 bottom, when the market saw only 90 deals and a paltry $8.6B of proceeds.

Hope for 2025 has been underpinned by optimism around AI and AI-adjacent companies going public, reflecting what appeared to be an insatiable appetite for these kinds of companies in 2024. In what is being considered a bellwether for the 2025 IPO market, CoreWeave, an AI cloud company, announced an anticipated IPO of nearly 50 million shares priced in an expected range of $47-$55 a share, raising between $2.3-$2.6B. The company, however, was able to offer only 37.5 million shares to raise $1.5B, reflecting not only the general sense of uncertainty, but also potential broader challenges facing AI businesses. In our view, many of the issues that weighed down this IPO are relatively idiosyncratic and associated with the particulars of CoreWeave and not an indictment on AI or on the future of IPOs in 2025.  When we get through this period of uncertainty, and start to see both equity and bond market volatility fall, we anticipate a healthier environment for IPOs later in 2025.