Earlier in the tariff cycle, U.S. businesses absorbed most of the costs. More recent estimates indicate that the balance is shifting, with consumers now expected to bear around 55% of total tariff costs as the effects of recent trade measures continue to filter through. Meanwhile the share absorbed by businesses has declined to roughly 22% as firms pass on higher input costs.10 What’s more, tariff rates on China, India, computer chips, and semiconductors are still being negotiated. Tariffs on specific goods, such as those that recently went into effect on lumber and wood products in October, have yet to appear in the data. And new tariffs were still being announced. We expect the impact of tariffs to continue to evolve in the quarters, and perhaps years ahead.
What does trade policy mean for portfolios?
The stronger-than-expected economy, coupled with forward expectations for greater corporate pricing power, leave us comfortable with U.S. equity risk. But the impacts of tariffs have not been uniform, even within sectors. Quarterly earnings calls will be closely watched for mentions of tariffs and the impact on margins. We favor a systematic approach to seeking winners and losers in affected sectors.
Consider dynamic strategies in tax efficient ETF wrappers, which can be accessed via the iShares U.S. Equity Factor Rotation Active ETF (DYNF) and the iShares U.S. Thematic Rotation Active ETF (THRO).
Because strong pricing power and higher inflation are often two sides of the same coin, we also believe targeted inflation protection such as Treasury Inflation Protected Securities (TIPS) or gold deserves consideration.
Such inflation hedges may be accessed via the iShares 0-5 Year TIPS Bond ETF (STIP) and the iShares Gold Trust (IAU). For investors with higher risk tolerance, we believe the fixed supply of Bitcoin may also help provide an effective inflation hedge.
The iShares Trusts are not investment companies registered under the Investment Company Act of 1940, and therefore are not subject to the same regulatory requirements as mutual funds or ETFs registered under the Investment Company Act of 1940. Investments in these products are speculative and involve a high degree of risk.
Finally, while we prefer the strong earnings growth and AI tailwind in U.S. large caps, it’s also important to note that broad geographic diversification has benefited many investors, even in a year fraught with geopolitical tensions. One global response to more uncertain U.S. trade policy has been lower demand for dollars, as evidenced by record annual purchases of gold by global central banks, and a 10% decline in the value of the USD.11 A cheaper dollar has propelled many international indexes to outperform domestic ones.12 Going forward, we anticipate the tailwind to continue and see international equities as a key source of diversification in an ever-evolving world.
Investors interested in adding international equity exposure to portfolios may consider the Advantage International Fund | BROIX | Institutional and Global Equity Market Neutral Fund | BDMIX | Institutional.
Contributors: Faye Witherall and Annie Khanna
