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US tariffs are at their highest since the 1930s
Analysis from The Budget Lab shows that the tariffs announced as of Friday would lead to a US effective tariff rate on imported goods of around 18%, the highest rate since the mid-1930s. Given that we haven’t seen a spike like this in recent history, it's quite difficult to model the impact of the shock on both inflation and growth. The Budget Lab believes that the tariffs will lead to lower growth and higher inflation, which intuitively makes sense. We probably can’t be more precise than that at this point – we need to see some data.
Over the weekend, US President Donald Trump also announced a 30% tariff on imports from Europe and Mexico, although USMCA-compliant exports from Mexico appear exempt, according to Bloomberg. Global futures are down, but not by a lot. The S&P 500 future is down around 0.4% and the Eurostoxx future is down 0.6% at the time of writing.
A 25% tariff on imported vehicles has been in effect since 3 April, but so far, there is little sign of it affecting second-hand vehicle prices in the US. The Manheim used car price index was up 1.6% month-on-month in June and up 6% year-on-year.
It is not immediately clear what the rationale for the 50% import tariff on copper is. The price of copper in the US immediately surged relative to the rest of the world on the announcement, and given its importance for the energy transition (and AI investment), it will presumably be a material headwind for growth in the US, should it persist. The copper tariff is due to be implemented on 1 August; the US copper price has already risen to 25% above the global price.
Despite all of this, volatility remains relatively low. It seems the market is pricing in the expectation that the Trump administration to not follow through completely with its tariff threats. It is a bit of a conundrum. The market remains optimistic that Trump will pull back, but he doesn’t need to pull back if the market is optimistic.
It might be that the market is simply focused on the latest GDP growth numbers, which have been OK. The latest Atlanta Fed GDPnow estimate for third quarter GDP growth is at 2.6%. The latest data suggests that EU growth will be slightly negative in the third quarter – a part reversal from the export-driven boost in the second quarter.
The Bloomberg consensus forecast is that US growth this year will be around 1.5%, followed by 1.5% again next year.
While there could well be a tariff-induced slowdown in the US, at this point, there is little to no sign of financial stress. In effect, the US economy continues to tick along at 1% to 1.5% GDP growth, and it appears the market is of the view that this situation will persist. There is probably some short-term downside risk to that view should the tariffs persist at their current scale.
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The Fed is thinking about cutting by year-end
The minutes from the last Federal Open Markets Committee (FOMC) meeting are now somewhat dated, given the latest tariff announcements. Nonetheless, it is probably worthwhile reviewing what they were considering should events be ‘normal’. Extracts from the minutes below.
“In considering the outlook for monetary policy, participants generally agreed that, with economic growth and the labor market still solid and current monetary policy moderately or modestly restrictive, the Committee was well positioned to wait for more clarity on the outlook for inflation and economic activity.”
“Most participants assessed that some reduction in the target range for the federal funds rate this year would likely be appropriate, noting that upward pressure on inflation from tariffs may be temporary or modest, that medium- and longer-term inflation expectations had remained well anchored, or that some weakening of economic activity and labor market conditions could occur.”
“In considering the likelihood of various scenarios, participants agreed that the risks of higher inflation and weaker labor market conditions had diminished but remained elevated, citing a lower expected path of tariffs, encouraging recent readings on inflation and inflation expectations, resilience in consumer and business spending, or improvements in some measures of consumer or business sentiment.”
In short, the FOMC is hardly in a hurry to cut and recent tariff announcements will probably make it more conservative. Even so, the market expects a cut in September and four cuts next year. There is ample scope for the market to be disappointed.
The S&P 500 is back at a record high
The US market has rallied strongly off the post-Liberation Day lows and closed at a record high on Thursday.
Concentration remains an issue in global equity markets. The US equity market still accounts for around 70% of developed market equities.
And a wide variety of individual country indices are concentrated too. The Top five US stocks now account for 25% of the index, according to Bloomberg data. In Brazil, the top 5 account for 40% while in South Africa, it’s 48%. In all those countries, a strong argument can be made for diversifying by much more than the home index would allow.
The market is pricing in strong earnings growth over the coming decade in the US
By taking into account the dividend yield of an index, the risk-free rate and an assumed equity risk premium, it’s possible to back out the market’s implied expected long-term growth rate for dividends (by reversing the dividend discount model). Based on this model, the market is currently pricing in 7.1% annualised long-term dividend growth in the US. The highest expectation in the past 20 years was 7.2%.
If inflation averages 2% over the long term, and the payout ratio is constant, then the market expects 5% real earnings growth a year. In contrast, European equities are priced for dividend growth of 3.4%. Given that earnings growth can’t be above GDP growth in perpetuity, it seems that the US market is pricing globalisation to continue (i.e., for US corporate earnings growth to grow faster than US GDP due to rising international access). Should globalisation be under threat (especially in light of the unfolding tariff story above), then the US equity multiple seems quite “punchy” too.
Trouble stirring on the default front?
May saw a material increase in the number of defaults across sovereigns and corporates around the world, according to data from S&P. The number of downgrades was up 86% month-on-month, off low levels. While defaults have ticked up, there is little sign of stress in credit markets.
US reporting season picks up pace
So far, 21 S&P 500 corporates have reported for the second quarter. 71% have beaten on the bottom line and the current consensus forecast is that earnings growth will be 5.7% (down from 10% last quarter). This week 37 corporates are due to report, and more than 50% are financials.
FactSet, a financial market data firm, has pointed out that US earnings have frequently come in above expectations. Based on past surprises, FactSet says it wouldn’t be surprised to see actual earnings growth this quarter near 10%. Meanwhile, operating margins in the US remain high relative to history and relative to peers.
Amazon now has over one million robots working in its warehouses
Increasing automation has allowed a smaller headcount in each Amazon facility, while the number of packages handled per employee per year has grown from 175 in 2015 to 3,870, according to the Wall Street Journal (‘Amazon Is on the Cusp of Using More Robots Than Humans in Its Warehouses’, 30 June 2025).
Listen to previous episodes
Macro Monday Ep78: The return of Liberation Day?
Wednesday is the day when US President Donald Trump’s Liberation Day tariffs are set to come into effect. There’s still some uncertainty about what will happen, says Chief Investment Strategist of Investec Wealth & Investment International Chris Holdsworth and even a further postponement of the tariffs is a possibility.
Macro Monday Ep77: What a weaker dollar means
The US dollar has weakened against most global currencies, but remains strong against most, on a purchasing power parity basis. Chief Investment Strategist of Investec Wealth & Investment International Chris Holdsworth argues that should the dollar weaken further, it could be good for emerging market equities and for commodities.
Macro Monday Ep76: Markets keep an eye on Iran
Following the weekend’s air strikes by the US on Iran’s nuclear facilities, markets are keeping an eye on Iran’s response, says Chief Investment Strategist of Investec Wealth & Investment International Chris Holdsworth. In particular, any attempts to shut the Strait of Hormuz will have an impact on markets, with 20% of global oil and LNG passing through the strait.
Macro Monday Ep75: Trade policy uncertainty weighs on the US dollar
Trade policy uncertainty continues to weigh on the US dollar, with even the euro gaining against the dollar despite last week’s rate cut by the ECB. Chief Investment Strategist of Investec Wealth & Investment International, Chris Holdsworth looks at how currencies are taking their cue from growth trajectories, rather than interest rate differentials.
Macro Monday Ep74: Trade policy uncertainty spikes
Trade policy uncertainty remains elevated, with US President Donald Trump responding to a court setback with the doubling of tariffs on steel and aluminium. Chinese trade talks appear to have stalled, while the US may retaliate with a tax on foreign owners of US securities, who come from countries deemed to unfairly tax US businesses. Listen to the weekly market round-up from the Chief Investment Strategist of Investec Wealth & Investment International, Chris Holdsworth.
Macro Monday Ep73: Tariff uncertainty and bond yields cloud the outlook
This week, Chris Holdsworth, Chief Investment Strategist, Investec Wealth & Investment International, looks at what’s clouding the US economy outlook including uncertainty about tariffs, weakening consumer sentiment and higher bond yields, partly stemming from a new tax bill that could add billions of dollars to US government debt in the coming years.
Macro Monday Ep72: Global inflation ticks down
In this episode Chris Holdsworth, Chief Investment Strategist, Investec Wealth & Investment International, discusses a general decline in inflation numbers around the world in April, indicating little reason for concern yet. However, uncertainty about policy and tariffs makes forecasting difficult, especially in the US.
Macro Monday Ep71: Assessing the aftermath of April’s tariffs
The world’s leading economies are seeing a deceleration in manufacturing activity, although they remain in expansive territory. In the US, earnings are being revised down, largely in response to the fall in GDP growth that this implies. Meanwhile the Fed is keeping rates steady in the face of an uncertain inflation outlook, but China is cutting rates to stimulate its economy. Chris Holdsworth, Chief Investment Strategist, Investec Wealth & Investment International, analyses high frequency data of economic activity across the world.
Macro Monday Ep70: Assessing the aftermath of April’s tariffs
Despite the tariff turmoil last month, US equities overcame the initial Liberation Day turmoil to end higher over the month. However, as Chris Holdsworth, Chief Investment Strategist, Investec Wealth & Investment International, points out, the rest of the world has been outperforming the US.
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