The financial markets are feeling the pinch after the first tariffs announced by the Trump administration came into force. How will investors respond to this correction? Patrice Geoffron looks at the short- and medium-term outlook.
Test of strength or proof of weakness? The unbelievable avalanche of new tariffs introduced by the Trump administration has rekindled a recurring debate about American influence in the world. Donald Trump, president of the world's leading economic and military power, justifies these measures with a rhetoric of decline: ‘Our country has been plundered, ransacked, raped and devastated’. In this way, Trump II claims to be ‘liberating’ his country from an international system that was initiated by the United States in the post-war period and has been widely supported ever since. The instant result: 3 April 2025 is one of the ‘top 30’ worst days for the S&P 500 since its inception, with losses close to those recorded in March 2020, and the risk of recession is estimated at 60% by JP Morgan (whereas Biden left the economy growing by 2.8% in 2024).
A possible return to stagflation
To determine the response strategy for the rest of the world, and the European Union in particular, it is important to consider the poison that this rupture represents for the US economy itself and to anticipate its effects. The impending return of stagflation (mediocre growth + inflation) is a pattern thought to have been eradicated in the most advanced economies since the twentieth century (as strange as the current return of a measles epidemic across the Atlantic). The Yale Budget Lab estimates that the new tariff package could lead to a 2.3% increase in consumer prices in the United States in the short term, representing an average additional annual cost of $3,800 per household.
Federal Reserve Chairman Jerome Powell does not rule out the possibility that these tariffs could have lasting effects beyond 2025. American companies that depend on foreign components or finished products will either have to absorb the extra costs, pass them on to consumers or reorganise their supply chains, which will take time and considerable investment. Ironically, the oil and gas industry is concerned about the effect of the 25% tax on steel imports, which will automatically drive up the cost of drilling and transport equipment. Given that the macroeconomic shock is dragging down the price of black gold (down $15 since the inauguration of President Trump), the ‘drill, baby, drill’ scenario is not looking good, with rising costs and falling end prices.
An incentive to wait and see
Admittedly, Trump and his team are presenting the shock as a bad moment whose worst is over. This should be seen as a form of wishful optimism, since the fog will take time to clear (if it does not turn to chaos, as it did in 2008), and the shift that has taken place can only encourage companies and households to adopt a wait-and-see attitude. Especially since, for households, the decline in the stock market has a direct impact on the value of pension funds and retirement accounts such as 401(k)s and IRAs, which are heavily invested in equities.
After the ‘blood and tears’, the Trump administration points to the possibility of long-term benefits, such as the repatriation of manufacturing industries, which would restore America's supposedly lost greatness. However, since the rules no longer have much value (whether in terms of international law, investment protection, competition law, etc.), investors could flee in the face of the acute country risk that the United States now presents.
