The Coast Is Not Clear on Tariffs

Jul 23, 2025

Bullish equity investors are shrugging off tariff risks, but lingering uncertainties on trade and inflation warrant caution.

Author
Lisa Shalett

Key Takeaways

  • U.S. equity markets have been reaching new highs, buoyed by economic resilience and postponed tariff deadlines.
  • However, significant uncertainty remains in global trade negotiations with key partners like China and the EU.
  • Early signs of inflation are also emerging, with notable price increases in goods and a weakening U.S. dollar.
  • Investors should consider focusing on strategic stock selection and diversification. 

U.S. equity markets have continued to celebrate the economy’s resilience and limited signs of resurgent inflation, after the White House postponed its original July 9 deadline for most new tariffs to kick in, extending it to August 1. With stock investors now seeming to shrug off tariff risks, the S&P 500 has been hitting new all-time highs while trading in a tight range.

 

Such optimism seems driven by beliefs that the administration’s tariff proclamations are just negotiation starters; legal challenges will render certain deals moot; and companies will pass only modest cost increases to customers and offset any hits to their margins through productivity gains.

 

Morgan Stanley’s Global Investment Committee does recognize that the economy has been more resilient than previously forecast. Still, we think it is premature to completely shrug off trade-related risks. Here’s why:

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Wealth Management

Ain't Seen Nothing Yet

The stock market seems unfazed by trade-related risks, but tariff paths remain uncertain and price pressures are rising. Here’s what equity markets might be missing.

  1. 1
    Uncertainty in Global Trade Deals

    Only three country-based deals – those with the UK, Vietnam and Indonesia – have actually settled, as of late last week. There’s still considerable uncertainty around negotiations with the largest trading partners of the U.S., like China, Canada, Mexico and the EU. Markets also have yet to see the potential impacts of the administration’s recently announced 50% tariff on imported copper as well as the government’s investigations into the national security implications of importing semiconductors and pharmaceuticals.

  2. 2
    Early Signs of Inflationary Pressure

    While it’s still too early to assess the full impact of tariffs, a closer look at recent inflation data may raise flags: For starters, goods prices, excluding auto, food and energy, jumped 0.5% in June, the fastest rise in three years. Analysts at Pantheon Macroeconomics reported price hikes on China-linked imports like appliances, toys and electronics of more than 2% in the month. They note that tariff impacts are also showing up in food prices, with fruit, beef and vegetables all up more than 1%. Additionally, even as discretionary services are seeing some weakening demand, “super-core” inflation – a measure that focuses on the prices of services, excluding energy, food and housing – is running hotter. Meanwhile, a weakening U.S. dollar has reduced Americans’ purchasing power on imported goods by about 8% since January.

  3. 3
    Complacency in Tariff Expectations

    Finally, we sense that equity investors are too complacent on where tariff levels could ultimately end up, especially if the administration is emboldened by stock market resilience. Consider that two of the three deals announced so far – imposing duties of 20% on Vietnam and 19% on Indonesia – suggest that tariff rates could move well beyond recent estimates of a 13% effective rate. For both countries, shipments from China would be taxed at an incremental rate of 30%, totaling an extraordinary 49%-50%. This is critical for items like apparel and houseware. The threat of 50% tariffs on Brazil is also noteworthy and would impact prices of key commodities like coffee.

Portfolio Moves to Consider

In short, the coast is not clear on tariffs. The Global Investment Committee believes investors should remain discerning and consider actively picking stocks, rather than chasing the market’s momentum.

 

Consider stocks with potential for upside surprise in earnings and cash flow, among select tech companies and others in financials, industrials, energy and parts of health care that may benefit from policy changes.

 

Avoid overhyped themes, and seek diversifying positions in international equities, commodities, energy infrastructure and hedge funds.

 

 

This article is based on Lisa Shalett’s Global Investment Committee Weekly report from July 21, 2025, “Ain’t Seen Nothing Yet.” Ask your Morgan Stanley Financial Advisor for a copy. Listen to the audiocast based on this report. 

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