The trade war has officially ended
The significant tariff anxiety of 2025 is over.
Back in April, many professional investors feared that tariffs would ruin the global economy. In fact, eight out of ten money managers participating in Bank of America’s Global Fund Manager Survey stated that “The trade war will cause a global recession.” This fear represented the largest market risk they had encountered in the survey’s 15-year history. Fast forward to September, and that alarm has nearly vanished—only 12% still viewed the trade war as their biggest worry, with inflation and monetary policy taking precedence instead.
This swift shift in investor sentiment is remarkable. It’s not just the less alarming headlines; there’s a growing belief that Donald Trump’s trade strategy has been effectively dismantled by Treasury Secretary Scott Bescent and US Trade Representative Jamieson Grier. They managed to reorganize global trade without initiating a destructive retaliatory trade war, something that many on Wall Street once feared.
From panic to confidence
An April survey taken shortly after the tariff announcements reflected peak anxiety about these tariffs. Managers cut back significantly on US equity exposure, with the record low weight of 36% in equity investments and opted for cash due to global slowdowns. A strategist from BofA noted at the time, “A big rise requires a big tariff easing,” suggesting that tariff reductions seemed the only viable path to growth.
By May, the panic had lessened a bit, with the threat of the trade war reduced to 62%, still high but down from the peak in April. Investors had absorbed the US tariffs on Chinese imports and it appeared that about 37% of them had come to terms.
June and July offered additional relief. The perception of the trade war dropped to 47% in June and in July, risk levels returned, which led to a decrease in cash levels down to 3.9%. This drop triggered BofA’s reverse “sell” signal—indicating that as investors turn optimistic, it could hint at an impending recession for stocks. If cash levels are too low, there isn’t enough liquidity to push stock prices higher.
By August, inflation and bond yields became new areas of concern, which pushed fears regarding the trade war down to 29%. Then in September, the change was complete: just 12% continued to see the trade war as the top risk, while 26% pointed to a “second wave of inflation.”
Why the shift in emotions?
The reasoning behind this change is straightforward: Retaliation never materialized. Instead of escalating tariffs, other countries struck deals with the United States. What many anticipated would turn into a global trade war ended up being a reorganization of trade influenced by principles established under Trump.
Trump had a game plan. Bessent and Grier executed it during negotiations, leveraging their position until foreign counterparts made concessions. Together, they achieved what seemed improbable: using tariffs to rebuild trade rather than destroy it.
Customs and deficits
The financial outcome is striking. Tariffs this year have generated about $165 billion, accounting for 0.5% of GDP. The effective tariff rate may rise to 14% by 2026, potentially bringing revenues close to 1.4% of GDP. According to projections from Bank of America economists, tariffs could reduce the primary deficit by $3.5 trillion over the next decade, along with $600-$700 billion in savings from interest costs. That’s nearly $4 trillion in deficit reduction.
For years, many investors viewed tariffs as purely detrimental to the economy. Now, however, they recognize that tariffs aren’t stifling growth. Rather, they are yielding government funding, deficit reductions, and shifts in production.
What about the new consensus that tariffs could lead us into a recession? Concerns about inflation? In September, more managers identified the “second wave of inflation” as their top concern. The fear is that tariffs might increase costs, drive up prices, and compel the Fed to maintain higher rates for longer.
But what if that perception is also misguided?
Federal Reserve Governor Stephen Milan argued otherwise. In a speech to the New York Economic Club, he suggested that tariffs and border policies are placing downward pressure on neutral interest rates, which are the rates that neither stimulate nor suppress economic growth, by boosting national savings, easing rent inflation, and slowing population growth. Milan estimated that tariffs could lower neutral rates by about half a point and stricter border policies by an additional quarter point. He cautioned that the Fed’s limited position—around 200 basis points—poses “significant risks” to job delegation.
From Milan’s perspective, the markets appear to be pursuing the wrong fears once again—what with the current inflation and looming recession fears. He contends that real issues lie in tariffs and immigration policies alleviating price pressures, thereby easing the Fed’s job.
Critics of Trump argued that the tariffs sparked a global trade war. But that war never unfolded. Instead, we witnessed Trump reshaping global trade.
This might lead investors to their next error by assuming that tariffs will drive inflation.
