Good, bad, ugly: What tariffs could mean for the economy and investors

SINCE ANNOUNCING STEEP TARIFFS ON MOST COUNTRIES in early April, the United States has modified or retracted some tariffs and announced new ones, with varying responses from abroad.¹ For investors, tariff uncertainties have raised questions on an array of topics: inflation, corporate earnings, stock performance, even the potential for an all-out trade war.

Although international trade policies are likely to keep evolving, some possible effects are emerging from the noise. In a recent issue of the Capital Market Outlook, the Chief Investment Office (CIO) examined the risks, potential benefits and reasons for long-term optimism on the U.S. economy. 

Good: A rebalancing of world trade

“The global trading system has long been overdependent on U.S. buyers,” says Joe Quinlan, head of Market Strategy in the Chief Investment Office for Merrill and Bank of America Private Bank. With just 4.7% of world population, the U.S. accounted for 13.5% of merchandise imports in 2024, according to the International Monetary Fund.

“Over time, higher tariffs may encourage export-oriented countries such as China and Germany to focus more on internal consumption,” Quinlan says, bringing trade into greater balance and creating opportunities for U.S. goods and services exports. Higher tariffs could also generate new revenue for the federal government and could encourage more foreign firms to manufacture in the U.S., he says.

Bad: U.S. companies feeling the pressure

“Despite those potential long-term benefits, tariffs are already hitting U.S. corporate bottom lines in industries as diverse as autos, food, clothing and construction,” says Ariana Chiu, wealth management analyst in the CIO. While many companies have thus far avoided passing increased costs on to consumers, 2025 could still see higher consumer prices and a dent in corporate earnings.

On the positive side, “U.S. companies have shown remarkable resilience in trimming costs, using excess inventory and finding cost-saving innovations,” Chiu adds. “And a weaker dollar this year has helped offset costs for U.S. multinational companies.”

Ugly: The (small) risk of a global trade war

The April U.S. tariff announcement sparked fears of a global trade war—especially after China and Canada announced steep retaliatory measures. “Canada and China have since reconciled with the U.S. to avoid a full-blown trade war. Other countries, while threatening retaliation, didn’t,” Chiu says. U.S. markets have rallied from their April slump, and many global markets have hit new highs in 2025, she notes. While a debilitating trade war could still occur, that threat has greatly diminished, Chiu adds.

What this means for investors

“For all of the risks, we’re constructive on the U.S. economy and earnings,” Quinlan says. Consumers remain resilient and capital expenditures, already rising, should benefit from fiscal stimulus in the federal “One Big Beautiful Bill.” As part of well-diversified portfolios built around their long-term goals, he suggests, investors may want to consider adding U.S. stocks, especially when tariff-related “squalls or scares” create buying opportunities.

Read the full Capital Market Outlook report. Listen to our latest CIO Market Update audiocast, and check here for regular updates tariffs and other economic and market conditions.

¹The New York Times, “A Timeline of Trump’s On-Again, Off-Again Tariffs,” Aug. 7, 2025.

With U.S. markets rebounding, are global stocks still as attractive?

INTERNATIONAL STOCKS SPARKED FRESH INTEREST among investors in early 2025, climbing just as U.S. markets struggled amid concerns over tariff policies.¹ Lately, the gap is closing. “Since mid-April, markets seem to have moved past peak tariff uncertainty and U.S. stocks have rebounded,” says Ehiwario Efeyini, senior market strategy analyst, Chief Investment Office (CIO), Merrill and Bank of America Private Bank. So, should investors still consider global stocks?

“This is a relative rather than absolute story,” Efeyini says. “While their big lead has been eroded, international stocks have nonetheless climbed to new highs this year and can still play an important part in a diversified portfolio.” But keep in mind that global markets are complex and varied. A recent CIO Capital Market Outlook report discusses some current potential opportunities and risks across various industries in developed and emerging economies. Some highlights:

Emerging markets: Technology

One reason for the U.S. market rebound since early April has been the surge in information technology, Artificial Intelligence and other technologies. “Those same forces are lifting countries such as South Korea, Taiwan and, to a lesser extent, China,” Efeyini says. “Developed markets such as the eurozone, Japan and the UK have considerably lower exposure to tech.”

Europe: Defense and industrials

Spurred by a surge in defense spending, “Europe’s aerospace and defense industry has been a top-performer globally in 2025, returning close to 65% as of the end of July,” Efeyini says.² “The so-called Readiness EU package unveiled in March allocates €800 billion annually to defense spending over four years, with the aim of reaching 3% of GDP by 2030.” Germany, meanwhile, has amended its constitution to enable greater spending on defense, clean energy, transportation and digital infrastructure — all of which should support EU industrials.

China and Japan: Potential headwinds

In China — for many years the world’s greatest growth story — a sluggish real estate market is putting a drag on everything from Chinese fixed investment to household balance sheets and consumer spending, Efeyini notes. While China is leaning into areas such as advanced manufacturing, robotics and clean energy, these may not be enough to overcome the current economic weakness.

Japan, which battled deflation since the early 1990s, now faces risks from inflation and the erosion of household real income. Core inflation has been running at 3.3% recently, well above Japan’s 2% target.³ Amid fears of new inflation spikes, “Japan has underperformed other major international markets this year,” he points out.

Parting thoughts: International stocks and your portfolio

“On balance, we favor U.S. stocks over international, especially given the recent momentum of U.S. markets,” Efeyini notes. “Yet international stocks can still help diversify a portfolio, and even with their strong performance in 2025, they may offer relative value compared with U.S. stocks.” An advisor can help you determine what role international stocks could play in your portfolio, he adds.

For more details on international equities, read the recent CIO Capital Market Outlook. Listen to our latest CIO Market Update audiocast, and check here for regular updates on U.S. and global economic and market conditions.

¹CNBC, “International stocks are ahead of the U.S. so far this year—how to add them to your portfolio,” June 6, 2025.

²MSCI Europe Aerospace and Defense Index as of July 31, 2025; Bloomberg as of July 31, 2025. 

³Statistics Bureau of Japan.

The new bill: How could it affect your taxes?

A SWEEPING NEW BILL, PASSED JULY 1 by Congress and signed into law on Independence Day, will affect the way millions of U.S. taxpayers claim personal deductions, transfer wealth, pay taxes on their businesses and more.

To help you better understand and plan for these changes, a recent Tax Alert from the Chief Investment Office (CIO) National Wealth Strategies team details the potential impact for individuals and small businesses. Here are some of the new act’s most consequential provisions related to taxes:

For individuals

• Maintains the gift, estate and generation-skipping tax exemptions. The legislation locks in the historically high exemptions that were due to drop sharply at the end of 2025, returning to the levels before the 2017 Tax Cuts and Jobs Act (TCJA). The 2026 exemption will stand at $15 million per individual and $30 million for couples, to be revised annually for inflation. The absence of a “sunset” date for gift and estate tax exemptions could remove some guesswork from long-term estate planning.
  
• Raises state and local and standard deductions. Through 2029, the state and local tax (SALT) deduction quadruples to $40,000. The deduction declines after $500,000 in income and reverts to $10,000 for all taxpayers exceeding $600,000 in income. Also increasing is the standard deduction for 2025, to $15,750 for individuals and $31,500 for couples – an increase of $750 and $1,500 respectively. In light of these new limits, taxpayers may want to review whether to use the standard deduction or itemize, the National Wealth Strategies team notes.
   

For businesses

• Maintains the qualified business income deduction. The deduction for up to 20% of qualified business income from “pass-through” entities, such as sole proprietorships and partnerships, which was part of the TCJA, is now permanent, and phases out under more favorable terms for income from certain businesses. Instead of paying tax at the entity level, owners of pass-through entities pay tax at potentially higher individual income tax rates. The pass-through deduction is intended to help make small business income more competitive with the low corporate tax rates.
  
  
• Enhances deductions for business costs. The legislation provides a host of tax benefits for businesses, including full expensing of property acquired after January 19, 2025, more generous rules for business interest deductions, greater section 179 deductions and more.
   

While the new act institutes tax advantages, it also ends a variety of tax credits for electric vehicles, energy-efficient homes, clean energy investment and more. These phase out on different schedules, as detailed in the CIO Tax Alert. Before making any tax decisions, be sure to speak with your tax professional, the National Wealth Strategies team suggests.

Read the recent CIO Tax Alert, “President Signs Reconciliation Bill with Significant Tax Changes.” And listen to our latest CIO Market Update audiocast, and check here for regular updates on market conditions.

Should you join the latest gold rush?

GOLD PRICES SOARED BY NEARLY 65% from the start of 2024 through mid-2025, to $3,400 per ounce on June 17. By comparison, the total return of the S&P 500 rose only 28% during the same period.¹ “Many Wall Street observers expect gold to move even higher, surpassing $4,000² in the not-too-distant future,” says Joe Quinlan, head of Market Strategy in the Chief Investment Office (CIO) for Merrill and Bank of America Private Bank. “With global central banks, China and others increasing their holdings, individual investors may want to consider whether adding some gold makes sense for their own portfolio.”

What’s driving the surge?

“Along with its qualities as a precious metal, gold acts as a hedge against inflation and geopolitical turmoil,” Quinlan explains. Those pressures, and growing concerns over U.S. debt and the dollar’s status as a global reserve currency, have contributed to a wave of buying.

“Stockpiling by central banks in 2024 helped gold surpass the euro as the world’s second-leading reserve asset after the dollar,” Quinlan says.³ And 95% of global monetary authorities believe central banks will increase their holding in the next year, one survey showed.⁴ Another major factor: Investors from China, who together bought roughly 124 metric tons of gold in the first three months of 2025, up 12% from the same period in 2024.⁵

Does gold have a role in your portfolio?

“Gold can offer investors diversification and long-term growth potential, and there are many ways to purchase it,” Quinlan says. Two prominent options:

• Gold ETFs invest directly in gold or in gold-related areas such as mining. As share owners, investors may benefit if gold values rise, but they don’t own the physical gold.
• Physical gold, purchased in bars or coins, offers direct physical ownership, though storage, security and insurance could add to your costs.
   

Know the risks

“Prices can be volatile, and recent increases are no guarantee of future value,” Quinlan says. And, unlike bonds or dividend-paying stocks, gold offers no investment income. As such, gold should be considered as a potential addition to your portfolio rather than a substitute for stocks and bonds. Quinlan adds, “An advisor, if you work with one, can help you determine if gold is right for your portfolio and how best to invest.”

Read our recent Capital Market Outlook for more insights on how gold, U.S. debt and other forces are shaping the current investment landscape, and listen to our weekly CIO Market Update audiocast for regular perspectives on market conditions.

¹Chief Investment Office, Capital Market Outlook, June 23, 2025.

²BofA Global Research, Global Metals Weekly, June 13, 2025.

³International Monetary Fund; World Gold Council. Data through Q4 2024, latest available..

⁴World Gold Council, “Central Bank Gold Reserves Survey 2025,” June 17, 2025

⁵China Daily, “Chinese investors race to buy gold amid uncertainties,” May 2, 2025.

Midyear Outlook: A game plan for the rest of 2025

IS ALL THE VOLATILITY BEHIND US — or is more choppiness on the way? Could we still see a recession this year? Which sectors could lead the way in a recovery? Are U.S. Treasurys still attractive? “After a tumultuous first half of 2025, we know investors have plenty of questions about what’s ahead,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.

For answers, watch 2025 Midyear Outlook: On the road to recovery, above. In it, “leading analysts from BofA Global Research set the scene with a look at what to expect from markets and the economy in the second half of 2025,” Hyzy says. “Then, top Chief Investment Office strategists offer actionable portfolio ideas, as well as thoughts on how to prepare for larger, long-term themes, such as technology and innovation, already reshaping the economy.”

For even more insights to help inform your investing decisions through year-end, catch these two midyear-related videos: Market Decode: Will the U.S. economy enter the “R” zone this year? and What’s up with Treasurys, the deficit and the dollar? Then read “As the fog of uncertainty lifts, what’s next for investors?” and take the pop quiz below.

“Staying on top of the latest market thinking can help you position your portfolio for the recovery when it comes,” says Hyzy. And maybe you can impress your friends with a few tips at the next summer barbecue.

TEST YOUR MARKET KNOWLEDGE

Tap + to select correct answer and learn more

True or false: Historically, after the S&P 500 declined more than 10%, markets have fallen an additional 10% in the 12 months that followed.

¹2025 year-to-date data as of April 8, 2025. Includes >10% corrections in the S&P 500 from 1980-2024. Source: Bloomberg.

Putting the latest Middle East volatility in context

WHAT JUST HAPPENED? Israeli airstrikes on Iran and the retaliation that followed sparked widespread volatility in U.S. and global markets on June 13, with oil and gold prices surging and stock markets dropping.¹ The attack raised concerns over the potential for a wider conflict and inflicted another sharp disruption on markets already rocked in 2025 by global tariffs, U.S. Treasury sell-offs, a U.S. credit downgrade and other challenges.

Our take on what this means

“U.S. equities, corporate earnings and consumers have shown remarkable resilience so far this year,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. “While the airstrikes raise many unsettling questions at a geopolitical level, we believe they are unlikely to fundamentally alter the course of the economy and the markets.” Rather, the strikes should be seen as one in a series of “pit stops” as the economy recovers, Hyzy says. “While these events, often unforeseen, cause temporary disruption, we believe that larger fundamental themes such as innovation, technology and U.S. resilience will ultimately pull the economy through.”

How should investors respond?

Hyzy adds, “Without a material change to those fundamentals, we see pit-stop-related market weakness as a potential buying opportunity for long-term investors.” Diversification is essential, he adds. Investors may want to consider strategic investment in U.S. innovation, technology and infrastructure, as well as non-U.S. stocks. Rebalance regularly amid periodic volatility and be sure any investments fit with your larger investment strategy and goals.

Read the recent Investment Insight report from the Chief Investment Office, “The first pit stop is here.” And for more insights as the geopolitical situation evolves, check back for regular updates and listen to our latest CIO Market Update audiocast.

¹The Wall Street Journal, “Stock Market today: Oil price surges, Dow drops after Israel attacks Iran,” June 13, 2025. 

What’s ahead for the rest of 2025?

TARIFFS, TRADE TALKS, A RATING DOWNGRADE: The year started off with enough activity — and market volatility — to fill headlines for a decade. “There are a lot of risks to pay attention to,” says Chris Hyzy, Chief Investment Officer, Merrill and Bank of America Private Bank. “Yet the fundamentals of the economy tell a different story.”

Watch the 2025 Midyear Outlook preview above for answers to top-of-mind questions like “What’s the likelihood of a recession this year?” and “When will we turn the corner on volatility?” Get an early look at the trends and developments likely to shape your investment decisions for the rest of the year. Then save the date — June 23 — and come back for the full program, 2025 Midyear Outlook: On the road to recovery, packed with insights from Hyzy and other strategists from the Chief Investment Office and BofA Global Research on:

• Inflation, interest rates and the Federal Reserve
• The outlook for consumers and the labor market
• How potential tax changes could affect the economy and the markets
• Sectors for short-term volatility and long-term growth
• Ways you can put it all together in a balanced, diversified portfolio

To stay on top of the markets and economy every week, read the CIO’s Capital Market Outlook and tune in regularly to the CIO’s Market Update audiocast series.

New reasons to consider value stocks now

GROWTH STOCKS HAVE DOMINATED market performance over the last decade, thanks to a handful of major technology firms known as the “Magnificent Seven.” Those giants have generated impressive returns during that time, says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank,  “As a result, many investors now face concentration risk at a time when diversification matters more than ever.” That’s why, says  Hyzy, now may be a good time to consider growth investing’s sometimes-overlooked cousin, value investing.

Growth or value: What’s the difference?

While the growth-value distinction can seem confusing (don’t all investors want their stocks to grow in value?), “It comes down to different approaches,” Hyzy explains.

Growth investors look for companies whose potential for fast-growing earnings or market share could boost returns. “These may include promising startups or established firms in innovative fields like technology or biotechnology,” Hyzy adds.

Value investors, by contrast, look for established companies (often in areas such as utilities or consumer staples) whose underlying value is greater than what’s reflected in their current share price.

What value stocks can offer

“One of our main themes going into 2025 was that markets are rotating to a broader set of leaders,” Hyzy says. “Value stocks are diversified across a wide range of industries and sectors and, so far in 2025, they have outperformed growth,” Hyzy notes. Historic tariff-related disruptions, starting in April, have only added reasons to consider value stocks, he adds. “Value companies may be more resilient, since they often focus on products that consumers need in any economic conditions.” Other advantages include the potential for steady dividends in volatile times, as well as discounted share prices for value, relative to growth stocks.

How to get started

“While individual funds often specialize in value or growth, you don’t have to choose just one approach for your portfolio,” Hyzy says. “We recommend diversifying both across and within asset classes.”  If you work with an advisor, they can help you determine whether your portfolio is overconcentrated in any specific area and adjust accordingly. “Be sure any allocation decisions you make fit with your overall investment strategy, timelines and goals,” Hyzy adds.

For a more in-depth look at value vs. growth, read this Equity Spotlight report from the Chief Investment Office (CIO), “Reiterating our positive view on large-cap value,” and check out “Growth and value: Two approaches to investing.”  Don’t forget to listen to the CIO’s Market Update audiocast regularly, and check back here often for timely updates on the markets and economy.

Understanding the latest U.S. credit downgrade

WHAT JUST HAPPENED? The rating agency Moody’s on May 16 downgraded the U.S. government’s credit rating from its highest Aaa to Aa1, citing what the agency described as the government’s failure to address growing debt and fiscal deficits.¹ Moody’s is the last of the three major rating agencies to downgrade the U.S., following Standard & Poor’s in 2011 and Fitch Ratings in 2023.²

Our take on what this means

“The downgrade was not a surprise,” says David Litvack, tax-exempt strategist for the Chief Investment Office, Merrill and Bank of America Private Bank. “Moody’s cited what investors have long known: large annual fiscal deficits over successive administrations and the likelihood that this trend will continue.” For example, extending the 2017 Tax Cuts and Jobs Act, scheduled to expire at the end of 2025, would add some $4 trillion to the federal deficit over the next decade, Litvack notes. Despite the downgrade, “we don’t expect forced selling of U.S. Treasury securities,” Litvack adds. “That’s not something we saw following previous downgrades.”

Notably, Moody’s acknowledged in its ratings report that the U.S. retains exceptional credit strengths such as “the size, resilience and dynamism of its economy and the role of the U.S. dollar as global reserve currency,” although it believes these no longer fully counterbalance the decline in fiscal metrics.

For more on the downgrade, read the recent Capital Market Outlook from the Chief Investment Office and be sure to listen to our latest CIO Market Update audiocast.

¹Moody’s Ratings, “Moody's Ratings downgrades United States ratings to Aa1 from Aaa; changes outlook to stable,” May 16, 2025.

²CNBC, “What Moody’s downgrade of U.S. credit rating means for your money,” May 19, 2025.

Why ‘Made in China’ may be here to stay

SHRINKING CARGO SHIPMENTS from China to the U.S.  — by one estimate, down 45% in mid-April from a year ago¹ — have raised fears of what effect a full-blown trade war could have on the economy, U.S. consumers and investment markets. For clues, just look at the contents of your home, suggests Joe Quinlan, head of Market Strategy in the Chief Investment Office (CIO) for Merrill and Bank of America Private Bank.

“Imagine going from room to room and taking an inventory of everything labeled ‘Made in China,’” Quinlan says. You’ll quickly begin to understand the significant potential ripple effects that a prolonged trade war could have on consumers, corporations and investors, including, among other factors, higher prices and slower GDP growth. Real GDP has already dropped 0.3% in the first quarter of 2025, according to the U.S. Bureau of Economic Analysis.²

A recent CIO Capital Markets Outlook report considers the risks through the window of a typical American home. For example:

Your kitchen: “Toast some bread? Nearly all (97.7%) toasters come from China,” Quinlan says. The same goes for almost 88% of microwave ovens, 80% of blenders and 70% of refrigerators.³

Bed and bath: “China is a major supplier of U.S. bedframes, mattresses, quilts, comforters and pillows,” Quinlan says. “In your bathroom, the mirrors, blow dryers, shower heads, even the toilet, likely came from China.”³

Elsewhere: Enter the playroom —  China makes about 75% of U.S. toys. Ditto for tennis shoes (nearly 74%) in the mudroom and family bikes (89%) in the garage. The list goes on. If you’re reading this on a smartphone, there’s an 81% chance you’re holding a Chinese import. “Heading to the beach this summer? That beach chair probably was made in China.”³

Reasons for compromise — on both sides

“Both countries have strong incentives to avoid a total trade breakdown,” Quinlan says. “Co-dependency runs deep.” U.S. consumers have benefited from inexpensive imports, and Chinese workers have higher employment and income. Despite a goods trade imbalance of $295 billion in China’s favor last year,⁴ “China remains one of the largest markets for U.S. goods,” he notes. “That’s why a total ‘divorce’ is not our base case.”

But even a trial separation might bring pain. Scarcity and higher prices could hamper U.S. consumer spending and corporate earnings. Another risk for companies: “U.S. factories are full of Chinese parts and components, all of which may be harder to find,” Quinlan says.

What can investors do?

With the tariff landscape so uncertain, investors should expect volatility and avoid trying to “time” markets, Quinlan suggests. “Stay invested in a diversified portfolio including high-quality, dividend-paying stocks in areas such as utilities and defense,” he adds. “If it feels like we’re staring into an abyss, keep in mind that markets and the economy have fully recovered from even greater uncertainties — including, most recently, the global pandemic.”

For more on U.S. imports from China and the potential impact of tariffs on the markets, read the CIO report, “Decoupling from China won’t be easy: Here is one way to think about it.” And be sure to tune in regularly to the CIO’s Market Update audiocast series for latest insights.

¹CBS News, “China exports to U.S. plunge as tariffs hit, leading some experts to warn of product shortages,” April 30, 2025.

²U.S. Bureau of Economic Analysis, Gross Domestic Product, 1st Quarter 2025, April 30, 2025

³Census Bureau. Data refers to 2024, as of April 2025.

⁴Morningstar, “U.S. ran the biggest trade deficits with China and Mexico in 2024. What about Canada?” Feb. 5, 2025.

Timely answers to your volatility questions

ANOTHER WEEK, ANOTHER ROUND OF VOLATILITY. With markets continuing their wild swings on April 21, investors in search of stability have some big questions: Are we past “peak uncertainty”? What’s ahead for the economy? How can I manage my portfolio?

Watch the video above as Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank, shares perspectives on these and other pressing issues with Head of Portfolio Strategy Marci McGregor.

Check back here for frequent updates on markets and the economy and tune in to the CIO’s Market Update audiocast series for latest CIO insights.

Tariff update: Why investors shouldn’t bail on bonds

AS UNCERTAINTY AROUND TARIFFS CONTINUES, churn in the equity market has been the primary focus for many investors. But the bond market is signaling equally if not more troubling signs that tariffs could do damage to the global economy. “Investors like to think of the bond market as boringly predictable. You can’t say that right now,” says David Litvack, tax-exempt strategist for the Chief Investment Office (CIO), Merrill and Bank of America Private Bank.

Normally, during heightened volatility, as the price of stocks drops investors flee to the perceived stability of bonds, and bond prices rise. During this latest bout of tariff-related volatility, however, investors have been abandoning bonds, causing their prices to fall and yields, or interest rates, to rise. “In early April, just prior to the announced 90-day pause on across-the-board tariffs for many countries, the market saw a sharp selloff in Treasury bonds, causing yields to climb,” says Marci McGregor, head of Portfolio Strategy for the CIO. That selloff has continued, creating signs of liquidity stress in the Treasury market. Such correlation between the stock and bond markets is rare, and was most recently seen during the pandemic, she notes.

What’s behind the bond selloff?

Several factors could be causing investors to bail on bonds, says Litvack. The latest volatility may have prompted some investors to sell Treasurys for cash as losses in the stock market built up. Continuing uncertainty around tariff policies might be causing others to move towards investments outside the U.S.  And, analysts believe, some selling may be the result of foreign governments’ selling of Treasurys as a form of retaliation.¹

Meanwhile, fears that Congress might soon curtail federal tax exemptions on municipal bonds has been driving a selloff in  munis, say Litvack. A January House Ways and Means Committee report listed muni tax exemptions among more than 200 possible cuts that could help pay for renewing the 2017 Tax Cuts and Jobs Act, which is due to expire at the end of 2025.²

How investors can respond

Muni investors should view the selloff as a potential opportunity, Litvack believes. “Congress is now beginning to debate potential spending and tax cuts as they negotiate the administration’s budget, and we believe muni tax exemptions will remain largely intact,” he says. While some muni subsectors, such as bonds issued by colleges and universities, could be at risk, there appears to be bipartisan support for maintaining the exemption, he believes. “In the event that legislation is passed that reduces future tax-exempt issuance, that should increase the valuations of existing muni bonds, because of their scarcity.”

“Fixed income is an important diversifier in any investor’s portfolio — and diversification is critical during periods of volatility,” adds McGregor. Should liquidity stress become a problem in the Treasury market, the Federal Reserve has tools in its toolkit to manage it, she believes. “And rising yields could make bonds very attractive, leading to a potential rally ahead.”

For more on fixed income in today’s markets, read the latest “Fixed Income Spotlight“ and check out “Is the muni tax exemption at risk?” in the CIO’s March 31, 2025 Capital Market Outlook.

¹CNN Business, “The bond market is acting weird. It spooked Trump,” April 11, 2025.

²The Wall Street Journal, “Are muni bonds still a darling on Wall Street? It depends who you ask,” April 2, 2025.

Volatility continues as U.S.-China trade war escalates

STOCKS FELL SHARPLY ON APRIL 10 after an historic surge the day before. Investors traded relief over a 90-day U.S. tariff pause on most countries for intensified worries over a newly announced 145% tariff on China and the potential for an all-out trade war between the world’s two largest economies.¹

“Along with stocks, we’ve seen sharp bond volatility in recent days, including a selloff in Treasurys, causing yields to rise,” says Marci McGregor, head of Portfolio Strategy for the Chief Investment Office (CIO), Merrill and Bank of America Private Bank. “Shifting policies have created a fog of uncertainty.”

A world of unknowns

As first-quarter earnings season begins, “Companies, unable to gauge what trade disruptions could mean for future earnings and capital investments, will likely remain guarded until they have more information,” she says. Even in the best case — a U.S.-China reconciliation —  corporate growth this year will likely be slower than previous expectations.

Yet some positive signs shine through the fog of uncertainty. “Cooling inflation data and strong labor numbers tell us the U.S. economy was on solid ground prior to the tariff announcements,” McGregor says. And historically markets have recovered relatively quickly after the S&P 500 index has fallen into correction territory. “In all of the other five times that’s happened since 1950, markets were up six months, a year, and two years later — with gains averaging 53.1% after two years.”²

Have a defensive plan — and a shopping list — ready

With market gyrations likely to continue amid these uncertainties, “Investors can take some control by preparing tactically for the short term and strategically for the long term,” McGregor says.

Short term. “The next few months may be a good time to play defense,” she adds. Investors might consider defensive stocks such as utilities, as well as dividend-paying and value-oriented stocks.

Long term. Looking ahead, investors can help position themselves for when the trade uncertainty recedes. “Have a ‘shopping list’ ready,” she suggests. Volatility may offer a chance to buy assets that support your long-term strategy, at attractive prices. “Uncertainty offers potential opportunities to rebalance, especially if your portfolio drifts from your targeted allocations,” she says. “Staying balanced and well-diversified is essential.”

For more insights from McGregor on current market conditions, listen to the April 10  CIO Market Update audiocast, and check back here for regular updates.

¹The Wall Street Journal, "Stock selloff accelerates as China trade war sinks in,” April 10, 2025.

²CIO & Bloomberg, S&P 500 returns on a price basis. Data as of April 4, 2025.

Two possible scenarios as tariff uncertainties play out

MARKETS CONTINUED TO SWING WILDLY on April 7 as investors struggled to process a world of uncertainty over tariff policies.¹ “The U.S. tariffs announced last week were far higher than expected and based on formulas investors haven’t seen before,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. Market worries include a potential growth and demand shock to the economy, higher inflation and escalating trade wars, he adds. “It is possible now to expect 0% earnings growth for the year if all of these uncertainties last into the summer months," Hyzy says.

Considering the many unknowns, including retaliatory tariffs and possible negotiations underway, “It’s impossible to gauge how long high tariffs might last, and what the endgame is,” Hyzy says. While swift negotiations could reset tariff policies and support market recovery, an extended trade war raises fears of recession and stagflation — stagnant growth and higher prices. As events unfold, Hyzy notes, investors should avoid making sudden decisions based on headlines.

What’s next? Three signs to watch for

In the days to come, here are some possible developments the Chief Investment Office (CIO) will be tracking:

• A changing narrative. “We’ll need some positive news on trade deals and policy ‘resets.’ In order to stem the tide, you have to change the narrative that sparked the fear,” says Hyzy.
• Corporate earnings.  “In the medium term, we need earnings to hold up better than expected,” Hyzy says. “Lower oil prices and lower interest rates could help to balance out lower demand stemming from trade uncertainties.”
• Employment. “As of now, the job market does not support recession fears. We’ll be closely watching employment figures in the coming months,” he adds.

Two possible scenarios

“For the next six months-plus, we see two potential scenarios with equal likelihood,” Hyzy says.

Scenario 1.  Countries scramble to negotiate substantive trade deals that bring tariffs down. “Bond yields would stay low but drift up slightly, and equity markets would recover some of the losses, led by technology, financials and consumer discretionary sectors.” Even in this positive scenario, economic growth will likely take time to recover.

Scenario 2.  The global standoff continues without substantive trade deals until countries realize economies are heading towards recession. “We could see bond yields, oil prices and commodities fall and stocks take longer to recover. The worry shifts to a steeper and extended downturn in corporate earnings.”

How you can prepare

With events so fluid, investors should prepare for further volatility as well as “positive surprises” as trade negotiations unfold, Hyzy advises. Exiting markets one day could prevent you from realizing gains if markets rebound the next. Now may be a good time to speak with your advisor if you work with one. “At a time when new information is coming in every hour, it’s important to have a plan and stay disciplined,” he says. Long-term investors may find potential opportunities to add to their portfolios during declines, Hyzy adds. You might also consider dollar-cost averaging,² which could enable you to buy relatively more shares at lower cost.

For continuing insights from Chris Hyzy on tariff-related volatility, be sure to listen to our latest CIO Market Update audiocast, and check back here for regular updates on market conditions.

¹The Wall Street Journal, “Trump threatens additional 50% tariff on China,” April 7, 2025.

²A program of regular investment cannot assure a profit or protect against a loss. A continuous or periodic investment plan involves investment in shares over time regardless of fluctuating price levels. You should consider your financial ability to continue purchasing shares during periods of low price levels.

April 3, 2025

Navigating tariff turbulence

WHAT JUST HAPPENED? A tariff on nearly all U.S. imports, announced April 2, sparked a global stock plunge the following day.¹ In early morning trading, Dow futures were down 1,200 or, 2.8%.² The tariffs set a baseline of 10% but are far higher for many countries — including 34% for China, 24% for Japan and 20% for the European Union.³

“Though asset markets have been preparing for some time, the announcement was more aggressive than consensus expectations,” says Chris Hyzy, Chief Investment Officer, Merrill and Bank of America Private Bank. A Chief Investment Office Investments Insights report, “Eyes Wide Open,” analyzes the current situation and what may be ahead.

Our take on what this means

“We believe market volatility is here to stay until we better understand how all of this plays out,” Hyzy says. Negotiations and deals among trading partners may lead to tariff adjustments and a settling of volatility, he adds. In the meantime, markets will likely experience a flight to safety.

“The largest concern now is the potential for a growth shock,” Hyzy says. As yet unanswered questions include the overall impact on global trade, potential secondary shocks to the services sector and possible monetary policy effects, he adds. “Despite uncertainties that may last for weeks or months, we believe the U.S. economy will be able to stave off a recession in the near term.” Corporate earnings, while potentially vulnerable to extended high tariffs, remain strong and U.S. consumers resilient, he believes.

How should investors respond?

“During this time of assessment, it is important to play both defense and offense,” Hyzy suggests. “Stay calm, diversify, and build a plan to reposition and rebalance your portfolio to take advantage of the improved prices that this uncertainty has created.”

Read the Investment Insights, “Eyes Wide Open”. Check here for regular updates on market conditions and be sure to listen to our latest CIO Market Update audiocast.

¹The Wall Street Journal, “U.S. Stock Futures, Dollar Tumble on Trump Tariff Plans,” April 3, 2025. 

²MarketWatch, “Stock futures heading lower into the open — Dow futures now down 1,200 points,” April 3, 2025.

³Reuters, “Trump tariffs: List of global responses and countermeasures,” April 3, 2025.

Where could stocks go from here? Watch these signals.

SO FAR, IT’S BEEN ONE OF THOSE YEARS: Markets rebounded after a mid-March correction,¹ but they continued to be volatile into the end of the first quarter over tariffs, inflation and other concerns. “We expect ongoing choppiness as markets try to repair themselves and adjust to policy uncertainties,” says Kirsten Cabacungan, investment strategist for the Chief Investment Office (CIO), Merrill and Bank of America Private Bank. “Yet, amid the tumult, we see encouraging signals that stocks could start to recover ahead.”

Signal 1: Bearish investors

Bullish versus bearish attitudes in the American Association of Individual Investors Sentiment Survey plummeted to -40% in recent weeks — far below the long-term average of 6.5%.² “While that sounds like bad news, the stock market tends to rebound on the heels of investor sentiment hitting rock bottom,” says Cabacungan. “Historically, the S&P 500 is up 90% of the time both six months and a full year later, with gains averaging 15.1% after six months and 22.3% after a year.”³

Signal 2: Market broadening

Though a few mega technology stocks have dominated equity markets in recent years, “returns in 2025 have broadened to include a wider array of sectors, styles and countries,” she says. In recent back-to-back sessions, more than 90% of companies on the S&P 500 rose on the same day.⁴ “The last time that happened was the week before the bear market trough in October 2022, which kicked off the most recent bull market advance,” Cabacungan adds. S&P 500 sectors like energy and healthcare, which struggled in 2024, have outperformed in early 2025.

What this could mean for your portfolio

“Volatility and market broadening both underscore the importance of diversification across and within asset classes,” Cabacungan says. Temporary downturns could provide opportunities to add underrepresented sectors. “While we still favor U.S. equities, you might consider adding exposure to international markets, which recently have outperformed the U.S. for the first time in years,” she says. An advisor can help ensure that any portfolio decisions align with your long-term goals.

For a closer look at signals pointing to a potential recovery, read “What comes after the market correction?” in the CIO’s Capital Market Outlook and check out the latest CIO Market Update audiocast.

¹Reuters, “Stocks rebound after S&P 500 correction, safe-haven gold touches record,” March 14, 2025.

²American Association of Individual Investors; Investor.com, “Bearish sentiment among retail investors hits new milestone amid tariff worries,” March 14, 2025.

³Bloomberg. Data as of March 19, 2025.

⁴Bloomberg. Data as of March 19, 2025.

The rebalancing act behind the latest volatility

SO, WHAT JUST HAPPENED? Equity markets dropped on Monday amid growing concern over the economy. Technology stocks led the decline, with the tech-heavy Nasdaq Composite Index falling by nearly 4%, and the S&P 500 down 2.7%.¹ Many news reports attributed the volatility to concerns around tariffs and recent comments from the administration about a possible recession.²

Our take on what this means

“While some Wall Street observers have raised the probability of a recession to nearly one in two, we don’t see it that way,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. “We see this, first and foremost, as a major rebalancing as market sentiment shifts away from growth areas, such as technology, which have dominated in recent years, towards more defensive sectors like healthcare, utilities and consumer staples.” He adds, “We believe this market drawdown, accelerated by profit-taking, is driven by economic growth worries, which in our view are exaggerated.” 

How should investors respond?

It’s more common than not to experience one or more corrections of 10% or more in any given year. “While volatility is always unsettling, investors should avoid sudden decisions to sell assets,” Hyzy says. “We view this weakness as a potential buying opportunity and a time for investors to consider rebalancing their portfolios,” he explains. “Now may be a time to explore diversifying into Europe and other developed markets, which are finally becoming more attractive after years of underperforming relative to the U.S.”

For a deeper dive into what’s driving the markets now and how you can consider responding, read the latest Investment Insights report from the Chief Investment Office, “From off the horse to back in the saddle,” and check out the latest CIO Market Update audiocast.

¹CNBC, “Dow tumbles nearly 900 points, Nasdaq suffers worst day since 2022 as recession fears erupt: Live updates,” March 10. 2025.

²The Wall Street Journal, “Stock Market Today: Nasdaq falls 4% after Trump doesn't rule out recession,” March 10, 2025.

Tit-for-tat tariffs are here. What should investors do?

THE OTHER SHOE HAS FALLEN. After a 30-day delay, the U.S. imposed threatened tariffs of 25% on imports from Canada and Mexico and increased tariffs on China early this week. America’s three largest trading partners responded by announcing plans to impose retaliatory tariffs, causing market volatility to rise sharply,¹ despite reports that a compromise might be reached, limiting the number of sectors subject to tariffs on goods from Mexico and Canada. Later in the week, the administration gave Mexico and Canada temporary reprieves on some goods, announcing that imports trading under the rules of the U.S.-Mexico-Canada Agreement would be exempt through April 2.²

Amid all the uncertainty, “investors are assessing the impact of these new tariffs on U.S. growth, business confidence and corporate earnings,” says Joe Quinlan, head of Market Strategy in the Chief Investment Office (CIO) for Merrill and Bank of America Private Bank. In a recent CIO Capital Market Outlook, Quinlan notes that the U.S. economy, which depends much less on trade than on the extraordinary power of consumer consumption, could be relatively well-positioned to withstand any negative impacts. Below, he offers insights on what investors could expect next and how they might respond.

Expect more turbulence ahead. A trade war could lead to global supply-chain disruptions, lower corporate earnings, higher prices for goods and services, higher-for-longer inflation and a pause in the global easing of interest rates, Quinlan says.

Focus on high-quality companies. In that environment, investors should consider companies with strong balance sheets, Quinlan adds. “Look to strike a balance between growth stocks, largely in technology, and value sectors such as healthcare, industrials and financials,” he suggests. “Dividend-paying stocks also look more attractive now, as do defense and cyber security leaders.”

Consider alternative assets^* and be selective about fixed income. Quinlan suggests thinking about alternative assets such as gold and other commodities, real estate and private credit. If interest rates rise, that could support allocations to investment-grade bonds, Treasury Inflation-Protected Securities (TIPS) and short-duration bonds.

Combine caution with calm. Amid today’s considerable uncertainty, Quinlan advises investors to stay focused on their goals. “If you work with an advisor, speak with them about the best way forward,” he says. “In this era of shifting dynamics, nimbleness and rebalancing remain prerequisites.”

Stay connected with the latest insights by tuning in to the CIO’s Market Update audiocast series.

TEST YOUR TRADE KNOWLEDGE

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True or false: U.S. exports of goods and services account for just 11% of gross domestic product (GDP)?

*Alternative investments are intended for qualified investors only. Alternative investments such as derivatives, hedge funds, private equity funds and funds of funds can result in higher return potential but also higher loss potential. There are special risks associated with an investment in commodities, such as gold, including market price fluctuations, regulatory change, interest rate change, credit risk, economic changes and the impact of adverse political or financial factors.

¹The Wall Street Journal, “Trump's Tariffs on Canada and Mexico take effect, with added duties on China,” March 4, 2025.

²The New York Times, “Trump Administration Live Updates: In reversal, most new tariffs on Mexico and Canada suspended,” March 6, 2025.

³Statista, 2025.

⁴CEIC Data, “United States Private Consumption: % of GDP,” December 2024.