Morgan Stanley
Wealth Management

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
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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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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Risk Considerations

Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.

Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate.

Bonds rated below investment grade may have speculative characteristics and present significant risks beyond those of other securities, including greater credit risk and price volatility in the secondary market.  Investors should be careful to consider these risks alongside their individual circumstances, objectives and risk tolerance before investing in high-yield bonds.  High yield bonds should comprise only a limited portion of a balanced portfolio.

Treasury Inflation Protection Securities’ (TIPS) coupon payments and underlying principal are automatically increased to compensate for inflation by tracking the consumer price index (CPI). While the real rate of return is guaranteed, TIPS tend to offer a low return. Because the return of TIPS is linked to inflation, TIPS may significantly underperform versus conventional U.S. Treasuries in times of low inflation.

Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision. 

Investing in foreign markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. Investing in currency involves additional special risks such as credit, interest rate fluctuations, derivative investment risk, and domestic and foreign inflation rates, which can be volatile and may be less liquid than other securities and more sensitive to the effect of varied economic conditions. In addition, international investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets and frontier markets, since these countries may have relatively unstable governments and less established markets and economies.

Investing in commodities entails significant risks. Commodity prices may be affected by a variety of factors at any time, including but not limited to, (i) changes in supply and demand relationships, (ii) governmental programs and policies, (iii) national and international political and economic events, war and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities and related contracts, (vi) pestilence, technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary distortions or other disruptions due to various factors, including lack of liquidity, participation of speculators and government intervention.

Hedge funds may involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees which may offset any trading profits, and in many cases the underlying investments are not transparent and are known only to the investment manager.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.  Technology stocks may be especially volatile. Risks applicable to companies in the energy and natural resources sectors include commodity pricing risk, supply and demand risk, depletion risk and exploration risk. Health care sector stocks are subject to government regulation, as well as government approval of products and services, which can significantly impact price and availability, and which can also be significantly affected by rapid obsolescence and patent expirations.

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