In This Issue:
• Global Uncertainty from Tariffs
• What is Changing for the World?
• The Investment Implications of a Disorderly World
“There's a case to be made that if inflation takes off, we could need to go higher on interest rates. Of
course, if the economy weakens dramatically from the uncertainty … that could bring interest rates down.
But both of those things are possible at the same time, and that's what makes this such a complicated
environment to navigate.” - Neel Kashkari, President of the Minneapolis Federal Reserve Bank, April 9, 2025
In This Outlook
Uncertainty remains a key feature of this environment and will be accompanied by periods of elevated market
volatility like we have experienced since the April 2nd tariff announcement. This uncertainty is resulting from the
radical trade policies emanating from Washington as well as the reactions from foreign nations. In less than 90 days,
the Trump Administration’s policies have shaken the world order in a highly disorderly manner. The pace of
Executive Order issuance and the lack of transparency as to the specific goals of the President’s policies have raised
global economic policy uncertainty to record levels as illustrated in Chart 1. This is leaving policymakers, business
owners, consumers, and market participants struggling to figure out how to respond.
There has been a dramatic shift in investor sentiment as the unconventional policies of the Trump Administration,
which were welcomed in November, are now causing fears of a global growth slowdown, potentially leading to a
recession. These fears were growing even before the Administration’s tariff announcements, which considerably
exceeded expectations, sending shock waves throughout the world before being postponed for 90 days. Under
these circumstances, it is difficult, if not impossible, for corporations to embark on multi-year capital spending
decisions with short-term spending continuing only in areas of need and clear opportunity with assured rates of
return. The benefit of periods characterized by heightened volatility lies in the potential for negative sentiment to
generate significant undervaluation among premier companies. This can encompass both high-quality businesses
within well-defined growth sectors and companies exhibiting robust balance sheets coupled with strong and
increasing dividend yields.
Chart 1. Global Economic Policy Uncertainty Index
Source: policyuncertainty.com
Three of the five primary areas of the Trump Administration’s focus – immigration, deregulation, and the lowering of energy
costs – have generally been viewed favorably. On the other hand, efforts on public sector reform have received mixed
reviews, while its tariff policy has not been well understood and poorly received. Chart 2 illustrates the increase in the
effective tariff rate based on the April 2nd announcement by the U.S. The President's decision to dismantle the post-World
War II economic order, built on freer trade and globalization and championed by the United States, represents a risky
undertaking. His aim is to reshape the world economy to prioritize U.S. interests and rectify real and perceived trade
imbalances affecting the nation.
Chart 2. President Trump’s Announced Tariffs Would Be Highest in 100 Years
Source: Evercore ISI
This period is particularly challenging due to the lack of clarity and predictability surrounding tariffs and policy goals. The 90-
day delay in tariff implementation, coinciding with difficult negotiations, will likely maintain the elevated volatility. This policy
ambiguity complicates the task for central bankers in setting appropriate policy, hinders corporations from making long-term
investments, and discourages consumer spending amid rising living costs.
Consequently, this uncertainty is significantly impacting consumer sentiment and investor confidence, as long-term
inflation expectations have seen their largest jump since 1993. Chart 3 illustrates this shift from optimism to pessimism,
driven by concerns that the U.S. economy is heading toward stagflation, defined as simultaneously rising inflation with
slowing growth.
Chart 3. Univ. of Michigan Surveys Reflect the Rapid Swing in Expectations
Next, we will discuss four key areas that are changing due to current conditions, what it means for the world, and
the investment implications for the economy and markets. While these times are full of uncertainties, we are
reminded of a quote from legendary investor Warren Buffett, “You know, people talk about this being an uncertain
time. You know, all time is uncertain. I mean, it was uncertain back in, in 2007, we just didn't know it was
uncertain. It was uncertain on September 10th, 2001. It was uncertain on October 18th, 1987, you just didn't know
it.” As Mr. Buffett knows, successful stock market investing isn't about avoiding risk, but about embracing
uncertainty to find opportunities. This involves buying well-positioned businesses at a discount to their intrinsic
value.
WHAT IS CHANGING FOR THE WORLD?
The interplay of forces in the world economy will significantly affect four critical areas in the year ahead:
geopolitics, consumer/business/investor behavior, fiscal policy, and monetary policy. These forces will also
influence global trade and exchange rates, as well as the rising cost of living. We briefly address each of these
areas below:
Geopolitics For global investors, the United States was once seen as the pillar of stability in the post-World
War II world. This trust stemmed largely from the belief, held by both allies and adversaries, that the U.S.
commitment to the rule of law and the established global order was essential for the past 75 years of growth.
Now, however, these foundational commitments are being questioned both at home and abroad. This shift marks
a departure from a long era of globalization towards increasing fragmentation, reversing trends established over
decades. The President’s current foreign policy approach carries the risk of alienating allies and driving them
towards China, rather than just incentivizing manufacturing in the U.S.
Fiscal Policy
Greater demands are being placed on governments at a time when most nations have either too
much debt or too little fiscal space to manage additional expenditures. Therefore, they will need to run larger
fiscal deficits, slow spending, or raise taxes. For investors, one of the most significant changes is U.S. fiscal policy
shifting from excessive fiscal and monetary stimulus to austerity to rein in government spending, while Europe
and China have announced significant increases in stimulus spending. For Europe, the stimulus is long overdue
and should contribute to increasing growth if EU nations move to act in a more unified manner. Germany’s
economy is estimated to reach $5.7 trillion in 2025, with growth forecast to rise 1.7%. In Europe’s largest
economy, recent proposals from the incoming Chancellor Merz call for an estimated $600 billion in spending on
defense and $528 billion on infrastructure and climate investments over several years, with the EU calling for an
additional $528 billion in defense spending for the region. For Europe overall, and Germany in particular, this
stimulus spending should provide a significant economic boost, but it comes at a time when both have been
suffering from political, cyclical, and secular challenges, making a successful outcome difficult.
As the second largest economy in the world and a rival to the United States hegemony, China has been
struggling since the pandemic and is dealing with its own economic issues including slowing growth, problems in
real estate markets, worsening demographics, an unbalanced economy, and concerns about its ability to export
products to its two biggest markets – the U.S. and E.U. Since the U.S. elections, many investors were expecting a
significant increase in China's already existing stimulus measures earlier this year. However, China waited for
tariff announcements and has now further implemented stimulus measures. These will likely serve only to cushion
its economy, while China continues exporting its excess capacity to the rest of the world.
Monetary Policy
Risks of inflation are decidedly more two-sided than expected at the start of the year. Chart 3
highlights the challenges for central banks in this environment, with consumer sentiment declining and inflation
expectations rising. If central banks cut interest rates aggressively in the face of higher inflationary expectations,
the cuts could spur inflation and force them to reverse policy course. If too slow to cut, central banks risk a
recession. At the time of this writing, the market expects the Federal Reserve to cut rates four times in 2025. That
is not our base case as ARS has been in the “higher-for-longer” camp on interest rates and would expect the Fed
to move at a more measured pace unless there is a financial crisis. As Fed Chair Jerome Powell said last Friday,
“While uncertainty remains elevated, it is becoming increasingly clear that the tariffs will be significantly larger
than expected. The same is likely to be true of the economic effects, which will include higher inflation and lower
growth… Our obligation is to keep longer-term inflation expectations well-anchored to make certain a one-time
increase in the price level does not become an ongoing inflation problem.” While expectations remain for multiple
rate cuts from the Fed, European Central Bank (ECB), and the People’s Bank of China, investors may find
conditions limit the ability of central banks to cut as aggressively as market participants may desire. Importantly,
the inflationary concerns speak to the value of owning equities and hard assets in this environment.
Consumer/Business/Investor Behavior
In times of heightened uncertainty, consumers and businesses
tend to restrict spending, which reduces corporate earnings and can lead to rising unemployment and possibly a
recession. At the same time, corporate expenses are increased by the impact of tariffs. Tariffs will lead to one of
three outcomes for corporations: the company can absorb the increased costs, it can pass the increase to the
consumer, or it can share the increase with the consumer. In any case, the cost of living will rise to a higher level,
and the economy will slow. The magnitude of each is currently unknown.
THE INVESTMENT IMPLICATIONS OF A DISORDERLY WORLD
“Maintaining stability in the new era will be a formidable task. It will require an absolute commitment to our
inflation target, the ability to parse which types of shocks will require a monetary action, and the agility to
react appropriately. Trade fragmentation and higher defense spending in a capacity-constrained sector may
push up inflation. Yet U.S. tariffs could also lower demand for EU exports and redirect excess capacity from
China into Europe, which could push inflation down.” - Christine Lagarde, President of the European Central Bank, March 12, 2025
Since the start of the year, sentiment has shifted. Optimism about the strong U.S. economy has given way to
fears of a global recession and stagflation, triggered by the Trump Administration's unconventional policies. As a
result, investors should anticipate a period of slower growth, renewed inflationary pressures, capital flows shifting
from U.S. equities to other asset classes and geographies, a weaker dollar, and fewer rate cuts from the Fed.
Regardless of the final level of tariffs, the cost of living will increase, and that makes the need for nations to
increase productivity even more important. Even if the tariffs work as the Administration hopes, there will be
timing differences that will create short-term dislocations in areas such as the availability of skilled labor and the
timing of tax revenues received from onshoring deals. Yet, we have been through challenges before, and the
strength and resilience of the U.S. economy have allowed the nation not only to survive but also to thrive and
grow. Chart 4 shows the World, European Union, China, and the United States GDP growth from 1980-2025.
When the decade of the 1980s began, the S&P 500 was at 107.94 in January of 1980 and was recently trading at
around 5000, while U.S. corporate pre-tax profits rose from $309 billion to $4.3 trillion. For all the problems we
have faced since the inflation bubble burst in the early 1980s to today, the world continues to grow, but it is never
in a straight line.
Chart 4. Comparison of World, U.S., EU, and China GDP 1980-2025
Source: World Bank Global GDP
Today, investors have options that they have not had in many years, as market participants invested with the belief
that “there is no alternative” to the U.S. But that may be changing. Europe and China are beginning to offer new
opportunities for equity investors, while the current interest rate levels are making both public and private credit
more attractive relative to equities as well. In the short term, capital flows may move away from U.S. equity markets
as we have seen recently, but ARS expects flows to return as the inherent strengths of the United States economy
reassert themselves. While tariff policy is dominating the headlines right now, there are several positives that are
not being recognized enough for the U.S. economy. Reshoring should reaccelerate after slowing the past two
years, efforts to rein in government spending will help with the debt and deficit financing, low taxes for
small/medium sized businesses and the possibilities of tax credits for reshoring and building plants in the U.S.
should help increase spending, while investments in improving productivity should help offset rising labor costs and
reduce inflation.
Three of our favored investment themes involve companies improving productivity through innovation, particularly
artificial intelligence, to offset higher costs; national security (including defense, energy, and industrial companies);
and those companies involved in rebuilding and modernizing our nation’s infrastructure. Long time readers of the
Outlook know ARS has reviewed the ASCE Infrastructure Report Card since it was introduced decades ago. The
study evaluates the current state of U.S. infrastructure and what is needed to keep our system in a state of good
repair. The U.S. received a grade of C in this year’s report, which is up from the 2021 report (See appendix).
However, much work remains and will require significant spending, as shown in Chart 5. The funding gaps are
considerable in surface and water transportation, water, energy, and aviation. As the federal government cuts
spending, a greater burden will be on state and local governments to step up, which will be a challenge for many
states.
Chart 5. ASCE Infrastructure Report Card 2025 -Funding Gaps in Critical Areas
Source: American Society of Civil Engineers, ASCE 2025 Infrastructure Report
In normal times, investing requires investors to make decisions with incomplete information, but today’s
environment is anything but. Therefore, the range of potential outcomes is even wider than it has been in the past.
Rather than get caught up in the short-termism so prevalent today, the ARS approach looks at the secular trends
driving capital flows over the next 3-5 years to allow us to move away from consensus thinking, while looking for
businesses selling for attractive risk-adjusted valuations over the next 12-18 months. In uncertain times such as
this one, market participants will be well served investing in the areas of required spending, including
reindustrialization, national security (including defense, space, cybersecurity, and critical infrastructure),
electrification, digitalization (including AI), productivity, and healthcare. As the United States and the world work
through the current challenges, some of which are self-inflicted, we are reminded of a quote from Warren Buffett’s
2021 annual letter to shareholders on the U.S., “In its brief 232 years of existence ... there has been no incubator
for unleashing human potential like America. Despite some severe interruptions, our country’s economic progress
has been breathtaking. Our unwavering conclusion: Never bet against America.”
Appendix
Published by the ARS Investment Policy Committee:
Stephen Burke, Sean Lawless, Nitin Sacheti, Greg Kops, Andrew
Schmeidler, Arnold Schmeidler, P. Ross Taylor, Tom Winnick.
The information and opinions in this report were prepared by ARS Investment Partners,
LLC (“ARS”). Information, opinions and estimates contained in this report reflect a
judgment at its original date and are subject to change. This report may contain
forward-looking statements and projections that are based on our current beliefs and
assumptions and on information currently available that we believe to be reasonable.
However, such statements necessarily involve risks, uncertainties and assumptions,
and prospective investors may not put undue reliance on any of these statements.
ARS and its employees shall have no obligation to update or amend any information
contained herein. The contents of this report do not constitute an offer or solicitation of
any transaction in any securities referred to herein or investment advice to any person
and ARS will not treat recipients as its customers by virtue of their receiving this report.
ARS or its employees have or may have a long or short position or holding in the
securities, options on securities, or other related investments mentioned herein.
This publication is being furnished to you for informational purposes and only on
the condition that it will not form a primary basis for any investment decision.
These materials are based upon information generally available to the public from
sources believed to be reliable. No representation is given with respect to their
accuracy or completeness, and they may change without notice. ARS on its own
behalf disclaims any and all liability relating to these materials, including, without
limitation, any express or implied recommendations or warranties for statements or
errors contained in, or omission from, these materials. The information and analyses
contained herein are not intended as tax, legal, or investment advice and may not be
suitable for your specific circumstances. This report may not be sold or redistributed in
whole or part without the prior written consent of ARS Investment Partners, LLC