Jul 22, 2025, 12:00 AM ETInterview, Podcast

Are Investors Complacent?

Average effective U.S. tariff rates on imports have increased by approximately 9 percentage points from the start of the year.
Current tariff composition includes 30% tariffs on China, 25% on non-USMCA Canada/Mexico, and a broad 10% baseline on other countries.
Sector-specific tariffs currently target the automotive, steel, and aluminum industries.
Goldman Sachs forecasts the average effective tariff rate will rise to approximately 14 percentage points by the end of the year.
The projected five-point increment is expected to result from a baseline rate increase from 10% to 15%, rather than additional sector-specific hikes.
Implementation of new tariffs on farmers has been pushed back to late next year or early 2026, following midterm elections.

Recent U.S. inflation data has been cooler than expected, with core PCE estimates holding steady at 25 basis points.
The firm anticipates year-over-year core PCE inflation will rise from the mid-to-high twos to the low threes due to tariff pass-through.
Tariff-induced inflation is viewed as a "price level effect" similar to a VAT increase, expected to boost inflation for roughly 12 months before subsiding.
U.S. GDP growth in the first half of 2025 averaged 1.2%, driven by massive quarterly front-loading distortions in Q1 and Q2.
Private sector employment growth has slowed significantly, with June figures well below 100,000 jobs.
Full-year 2025 GDP growth is forecast at 1% to 1.5%, reflecting a substantial slowdown attributed to tariffs and other factors.
Financial conditions have stabilized and uncertainty measures have declined, mitigating initial fears regarding immediate economic collapse.

The "Big Beautiful Act" is fiscally expansionary in the near term, with tax cuts arriving faster than spending cuts.
Estimated near-term growth stimulus from the fiscal package is between 0.3 and 0.5 percentage points in early 2026.
When tariff impacts are included, the overall fiscal stance is considered more neutral, with growth effects likely offsetting.
Federal deficits are projected to remain at 6% of GDP indefinitely absent sustained consolidation efforts.
The large primary deficit implies a rising debt-to-GDP ratio, which may gradually increase long-term term premia on Treasuries.
Equity markets remain resilient, anchoring on a medium-term growth narrative despite near-term tariff-induced weakness.
Inflation markets are pricing in higher near-term inflation, reflecting a shift in focus from growth risks to price level effects.
Market pricing assumes a one-off economic adjustment rather than a sustained period of weakness, provided tail risks do not materialize.

Short-term interest rates are currently above the estimated neutral rate of interest, which sits in the low-to-mid threes.
The baseline forecast anticipates the Fed will begin cutting rates in September, implementing a 25 basis point cut immediately.
Two additional 25 basis point cuts are expected in subsequent meetings in 2025, followed by a further 50 basis points in 2026.
Timing of rate cuts depends on sufficient confidence that inflation increases are temporary tariff effects rather than permanent shifts.
The market is currently pricing slightly under a 50% chance of a rate cut in July, with September being the primary focus.
Potential replacement of the Fed Chair in 2026 is expected to be an orderly transition with three new Board appointments.
Market consensus suggests a new Chair may lean dovish, potentially reinforcing a steepening yield curve and further dollar weakness.
The Supreme Court decision protecting Fed independence from removal without cause is viewed as a stabilizing factor for policy continuity.

The U.S. dollar continues to depreciate despite stabilizing U.S. economic data, driven by structural factors rather than cyclical weakness.
Key drivers of dollar weakness include a high broad trade-weighted valuation, a large current account deficit, and institutional concerns.
Goldman Sachs views the dollar depreciation as a multi-year process currently in its middle stages, with room for further adjustment.
Euro area growth is expected to remain subdued in the second half of the year after a front-loaded boost, though 2026 growth could reach 1.5% to 2% due to German fiscal stimulus.
Chinese GDP growth is forecast at 4.5%+, with the industrial sector demonstrating resilience against U.S. tariffs despite a weak domestic housing market.
U.S. exports to China remain down approximately 20%, but overall Chinese goods exports have been surprisingly resilient.

The primary tail risk for equity markets is a genuine rise in the unemployment rate that could reignite recession fears.
Structural trends favor a steepening yield curve, lower short-term yields, and periodic testing of higher long-term yields.
Commodities teams maintain a medium-term bearish view on oil prices, with risks skewed to the downside.
Diversification in U.S. equities is recommended, with non-U.S. investors advised to hedge currency exposure.
Unique value opportunities in the U.K. market, particularly in AI, are highlighted as attractive distinct exposures.
Investors should monitor cumulative exposure to joint risks involving fiscal sustainability, monetary independence, and dollar weakness.
Shorter-dated bonds are viewed as a protective measure against the identified recession tail risk.