Timing: A Window of Opportunity… for Now. Unexpected wider and larger-scope tariff announcements have sent tremors through bond and equity markets, resulting in a brisk sell-off that signals investors’ caution. Companies, wary of the looming cost increases, are ramping up their activities in a bid to secure inventory before the higher tariffs take full effect. Recent months have witnessed record import orders as firms engage in a classic preemptive stockpiling maneuver. With an abundance of inventory to cushion the blow, the direct impact on retail pricing may be deferred by two-to-three months for consumers.
Magnitude: The Real Weight of Tariff Turbulence. Even as timing buffers offer a temporary reprieve, the magnitude of these tariff shocks looms ominously large. Both consumers and corporates have, over recent years, built up savings and resilience — stress-tested during the high inflation episodes of 2022. However, the numbers behind these tariffs tell a daunting story. In particular, the very high tariff rate of 145% imposed on Chinese goods is a stark cause for concern. While exemptions exist, early Goldman Sachs estimates indicate that substitutes are hard to come by for roughly 20-30% of these imports. For corporations that depend heavily on Chinese supply chains, this means that if the steep tariffs persist, businesses could face severe supply chain stress — a domino effect that would ripple outwards, affecting production schedules, profit margins, and ultimately, consumer prices.
Navigating a Dual-Edged Sword. The current scenario presents a dual-edged dilemma: on one side, the short-term deferral of higher costs due to preemptive stockpiling, and on the other, the potent risk of structural cost increases and supply chain disruptions in the medium to long term.
For consumers, the resilience built from prior periods of economic stress offers some comfort. However, once corporate inventories are exhausted and suppliers are forced to operate at the new cost levels, the anticipated surge in prices could quickly erode household spending power. It’s a classic case of deferred pain — the initial shock is absorbed by preemptive measures, but the real financial sting may come a few months down the line when the market adjusts to the tariff-imposed cost structure. Analysts will be keenly observing not only the immediate response from market participants but also the long-term adjustments in corporate supply chains. The adjustments, while potentially stabilizing in the long run, may trigger a period of volatility as the market adapts to a new, tariff-influenced reality.
What’s on the Radar? In conclusion, the dual factors of magnitude and timing in these tariff measures create a complex and unsettling landscape. For now, the strategic purchasing spree acts as a stop-gap measure, but once the buffer of abundant inventory is depleted, the full brunt of the tariff shock is likely to be felt. Investors and market participants will need to brace for a period of adjustment, watching carefully as supply chain stress and price increases set in over the coming months.
— Peter Wilke, CFA – Head of Tactical Asset Allocation, Global Asset Allocation
Interest Rates
While there is plenty to monitor in financial markets currently, we continue to track balance sheet policy and money market conditions closely. Citing a desire for a “longer runway” to reduce the size of their balance sheet, the Fed halved the pace of balance sheet runoff at their March meeting, effective this month. While that adjustment didn’t have any immediate impact on market conditions, the next change in balance sheet policy is likely to be a conclusion to balance sheet reduction – a shift that may have more of an impact.
Meanwhile, the Secured Overnight Funding Rate (SOFR), an aggregation of repurchase agreement transactions and gauge of funding rates, has been volatile over the past several months. We consider this volatility perfectly normal within the target range. However, SOFR trading higher than the certain administered rate, or persistently near or above the top of the Federal Funds Target range, may be associated with stress in the funding markets with potential spillover into other asset classes. Accordingly we'll continue to monitor developments in these markets closely, as well as any feedback loop to balance sheet policy.
— Dan LaRocco, Head of U.S. Liquidity, Global Fixed Income
- Volatility within the target range for SOFR is normal.
- The Fed halved the pace of balance sheet reduction beginning this month.
- We continue to monitor money markets closely for signs of stress in fixed income markets.
Credit Markets
A constant stream of headlines drove risk asset performance in March, as heightened uncertainty from seemingly daily shifts in tariff policy caused the S&P 500 to have its largest monthly decline since December 2022. Despite recent market stress, credit fundamentals and technicals remain solid. Credit metrics for high yield for the fourth quarter have showed modest improvements off an already strong base. High yield issuers saw its first decline in leverage in four quarters with 15 of 18 sectors experiencing improvement.
Leverage metrics remain well below the long term average. Interest coverage has also improved for the first time in more than two years. High yield spreads (as of 4/8/25) have hit their highest level since October 2023 at 453 basis points (bps). The historical median 12-month forward total return for high yield with an index OAS range between 400-500 bps is 6.2% with a median excess return of 3.7%. While volatility could continue to be elevated in the short term, historically this has been an attractive entry point for a longer investment horizon.
—Ben McCubbin, Co-Head of High Yield, Global Fixed Income
—Sau Mui, Co-Head of High Yield, Global Fixed Income
VALUATIONS AND FORWARD RETURNS
Wider spreads can lead to higher future returns.
- Credit metrics for high yield in the fourth quarter have showed modest improvement off of a strong base.
- High yield spreads (as of 4/8/25) have hit their highest level since October 2023 at 453 basis points (bps).
- The historical median 12-month forward total return for high yield with an index OAS range between 400-500 bps is 6.2% with a median excess return of 3.7%.
Equities
Since the end of February, U.S. large caps have declined 16.4% through April 8. An already wobbly equity market saw uncertainty hit a fever pitch following tariff details from April 2. In that time, defensive sectors have significantly outperformed cyclicals. Meanwhile, within both defensive and cyclical sectors, low risk stocks outperformed high risk stocks by a wide margin as investors flocked to safety. This dynamic across and within sectors was seen outside of the U.S. as well. Developed ex-U.S. and Emerging Markets held up well until April 2 before taking a significant downturn as the tariff retaliation cycle evolved.
Earlier in the year, large cap U.S. earnings were expect to grow around 11% year-over-year. That number has been thrown into serious doubt, and we expect to see negative analyst revisions. But the situation is highly fluid. Absent a significant pivot in trade policy, we expect a bigger shock to the U.S. macro picture. Despite increased recession odds, with U.S. equities already down around 20%, we decided to slightly trim the overweight. We also initiated a 2% overweight to Developed ex-U.S. equities, as we continue to see better opportunities there following recent approval of fiscal spending out of Europe.
— Jordan Dekhayser, Head of Equity Client Portfolio Management
RISK-OFF TRADE ACCELERATES
Defensive stocks and sectors take the leadership mantle.
- As risk picked up, defensive sectors and stocks outperformed during the sell-off.
- Developed ex-U.S. and Emerging Markets held up until April 2 when they too saw significant drawdowns.
- Despite increased recession odds, with U.S. equity markets already down around 20%, we slightly trimmed our U.S. equity overweight. We also initiated a 2% overweight to Developed ex-U.S. equities.
Real Assets
Given the rising macro volatility in the markets, we thought it would make sense to run through different economic scenarios for U.S. commercial real estate transaction volumes.
Consider a recessionary scenario of higher tariffs and lower net immigration leading to higher inflation and elevated interest rate volatility. The assumption in this scenario is that a recessionary environment would cause physical office utilization to wane as companies look to reduce costs. In this scenario, the expectation is that transaction volumes decline over the course of 2025 as the economy worsens, but still keep up with results from a depressed 2024. The expectation for 2026 would be macroeconomic pressure leads to an approximately 20% reduction in transaction volumes.
Next, we assess a more stable scenario with positive U.S. real GDP growth and moderate tariff impacts. We would expect relatively stable rates, job growth and stronger office occupancy. In this scenario, investors should expect transaction volumes to rally around 15% in 2025 off of lower 2024 volumes and then another 7% in 2026.
— Jim Hardman, Head of Real Assets, Multi-Manager Solutions
CRE STRESS TEST
U.S. Commercial Real Estate transaction volumes are expected to be impacted by macroeconomic factors.
- For real assets, we believe it prudent to assess distinct economic scenarios in this environment.
- We confirm our equal weight to real estate on stable fundamentals, fair valuations, and expectations of accretive external growth.
Unless noted otherwise, data on this page is sourced from Bloomberg as of April 2025.
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IMPORTANT INFORMATION
Northern Trust Asset Management (NTAM) is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Northern Trust Asset Management Australia Pty Ltd, and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.
Issued in the United Kingdom by Northern Trust Global Investments Limited, issued in the European Economic Association (“EEA”) by Northern Trust Fund Managers (Ireland) Limited, issued in Australia by Northern Trust Asset Management (Australia) Limited (ACN 648 476 019) which holds an Australian Financial Services Licence (License Number: 529895) and is regulated by the Australian Securities and Investments Commission (ASIC), and issued in Hong Kong by The Northern Trust Company of Hong Kong Limited which is regulated by the Hong Kong Securities and Futures Commission.
For Asia-Pacific (APAC) and Europe, Middle East and Africa (EMEA) markets, this information is directed to institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. This information may not be edited, altered, revised, paraphrased, or otherwise modified without the prior written permission of NTAM. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. NTAM may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, its accuracy and completeness are not guaranteed, and is subject to change. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor.
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Past performance is not a guarantee of future results. Performance returns and the principal value of an investment will fluctuate. Performance returns contained herein are subject to revision by NTAM. Comparative indices shown are provided as an indication of the performance of a particular segment of the capital markets and/or alternative strategies in general. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index. Net performance returns are reduced by investment management fees and other expenses relating to the management of the account. Gross performance returns contained herein include reinvestment of dividends and other earnings, transaction costs, and all fees and expenses other than investment management fees, unless indicated otherwise. For U.S. NTI prospects or clients, please refer to Part 2a of the Form ADV or consult an NTI representative for additional information on fees.
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